PRINCIPLES 

OF 

INDUSTRIAL   ORGANIZATION 


BY 

DEXTER   S.   KIMBALL,   A.B.,   M.E. 

Professor  of  Machine  Design  and  Construction  in  Sibley  College,  Cornell 

University.    Member  of  the  American  Society  of  Mechanical 

Engineers.      Author   (with  John  H.   Barr)   Elements 

of  Machine  Design;  Industrial  Education,  etc. 


FIRST  EDITION 
SEVENTH  IMPRESSION 


McGRAW-HILL  BOOK  COMPANY,  INC. 

239  WEST  39TH  STREET.    NEW  YORK 


LONDON:  HILL  PUBLISHING  CO.,  LTD. 

6  &  8  BOUVERIE  ST.,  E.  C. 

1913 


COPYRIGHT,  1913,  BY  THE 
McGRAW-HILL  BOOK  COMPANY,  INC. 


MAIN  LIBRARY 


PREFACE. 


As  industrial  enterprises  have  grown  in  magnitude,  as  proc- 
esses have  become  more  refined  and  competition  more  keen  the 
problems  of  organization  have  steadily  grown  in  importance. 
Just  as  the  tools  and  processes  of  our  forefathers  became  inade- 
quate as  enterprises  grew  in  magnitude  so  the  simple  adminis- 
trative methods  formerly  in  use  have  long  since  been  outgrown 
by  modern  plants.  Aside,  however,  from  these  reasons  there  are 
other  factors  affecting  organization,  which,  while  of  little  impor- 
tance in  former  times,  promise  to  be  of  great  importance  in  the 
organizations  of  the  future. 

The  ideals  that  man  has  held  before  him  in  his  toilsome  journey 
from  savagery  to  civilization  have  varied  with  changing  time  and 
place.  Among  many  of  the  older  nations  war  was  the  central 
thought,  the  country  was  an  armed  camp  and  predatory  methods 
were  an  approved  means  of  national  support.  In  other  cases 
some  form  of  religion  was  the  predominating  influence,  and  the 
social  and  industrial  organization  was  modelled  accordingly.  In 
a  few  of  the  older  civilizations  industry  was  held  in  high  esteem; 
but  for  the  most  part  it  was  considered  menial  to  labor  and  industry 
was  adjudged  by  standards  that  now  seem  strange  indeed. 

But  as  the  humanistic  side  of  civilization  has  made  progress 
we  have  attained  higher  ideals  regarding  industry.  Never  before 
in  the  history  of  mankind  has  it  been  so  universally  acknowledged 
that  physical,  mental  and  moral  well-being  rest  upon  and  are 
solely  supported  by  labor.  Industry  is  the  business  of  the  civilized 
world,  .and  the  greater  part  of  our  problems,  national,  state  and 
home,  center  around  the  great  industrial  questions.  Furthermore, 
industry  is  being  looked  upon  more  and  more,  not  as  an  incidental 
matter,  nor  merely  as  a  means  of  securing  personal  profits,  but  as 
the  great  basic  feature  of  our  civilization  on  which  must  rest  our 
entire  well-being. 

And  with  this  new  evaluation  of  industry  has  come  new  and 
higher  ideals  regarding  service  to  humanity.  No  longer  is  it 

vii 

4-  o  \  TG  o 


viii  PREFACE 

considered  necessary  merely  to  tell  people  how  to  improve  them* 
selves  mentally,  morally  and  materially,  but  there  is  a  cry  for  a 
remodelling  of  our  industrial  structure  that  will  put  the  material 
basis,  on  which  these  improvements  rest,  into  the  hands  of  all. 

It  is  for  these  reasons  that  the  ideas  embodied  in  so-called 
scientific  management  are  coming  in  for  such  close  scrutiny. 
Changes  of  a  similar  character  and  as  far  reaching  in  their  effects 
have  been  made  in  our  industrial  methods  in  times  past  with 
little  or  no  comment  from  any  quarter.  But  to-day  changes  of 
this  character  cannot  be  made,  as  formerly,  on  the  basis  or  plea 
of  increased  production  alone.  The  spectre  of  distribution  of 
profit,  the  bugbear  of  our  industrial  system  stands  constantly 
in  the  background,  and  the  question  that  it  ever  raises  —  What 
will  be  the  effect  of  these  changes  on  humanity?  —  can  no  longer 
be  ignored. 

An  intelligent  appreciation  of  even  the  simpler  problems  of 
factory  organization  and  operation  cannot  be  attained  without 
some  knowledge  of  the.  origin  and  trend  of  these  modifying  factors. 
Already  the  effects  of  many  of  them  are  rapidly  passing  from  the 
transitory  stage  of  public  sentiment  into  the  more  permanent  form 
of  state  or  national  legislation.  This  is  the  writer's  excuse, 
if  any  is  needed,  for  the  first  four  chapters  of  the  book.  It  is 
not  the  purpose  of  the  book  to  exploit  any  form  of  industrial 
management  or  any  specific  remedy  for  industrial  evils,  but  it 
is  an  endeavor  to  set  before  young  men  entering  the  industrial 
field  the  salient  facts  regarding  the  most  important  movements 
with  which  they  are  sure  to  be  brought  into  contact,  and  to  ex- 
plain the  origin  and  growth  of  the  important  features  of  industrial 
organization. 

To  the  engineer  whose  ever  widening  circle  of  usefulness  brings 
him  more  and  more  in  contact  with  economic  problems  these  are 
matters  of  peculiar  importance,  and  it  is  for  the  needs  of  young 
engineers  primarily  that  the  book  has  been  written,  being  based 
on  a  course  of  lectures  given  by  the  writer  for  a  number  of  years 
past  to  the  senior  class  in  Sibley  College  of  Mechanical  Engineer- 
ing, Cornell  University.  It  is  hoped,  however,  that  the  practicing 
engineer  or  manager  who  wishes  to  know  something  of  the  funda- 
mental principles  of  organization,  without  regard  to  some  specific 
system  of  management,  may  also  find  it  of  interest. 

It  has  been  the  writer's  endeavor  to  deal  as  far  as  possible 


PREFACE  k 

with  general  principles  only,  and  no  effort  has  been  made  to  illus- 
trate the  many  kinds  of  cards  and  forms  used  in  industrial  manage- 
ment; only  such  cards  and  forms  having  been  shown  as  were 
necessary  to  illustrate  the  principles  discussed.  These  documents 
are  so  varied  in  character  that  they  possess  little  educational  value 
except  as  they  illustrate  principles,  though  instruction  in  this 
subject  is  greatly  aided  by  collections  of  the  cards  and  forms  used 
in  representative  systems  of  management.  Such  documents, 
also,  grow  naturally  out  of  the  needs  of  the  business  concerned, 
and  the  form  or  blank  that  is  best  for  one  industry  may  be  entirely 
unsuited  for  the  same  purpose  in  another.  If  the  need  is  clearly 
denned  there  is  usually  no  trouble  in  making  a  card  or  form  that 
will  be  exactly  suited  to  the  work,  though  the  practical  man  can, 
of  course,  obtain  help  and  suggestions  from  collections  of  such 
documents. 

The  writer  has  availed  himself  freely  of  the  works  of  other 
writers,  and  has  endeavored  to  give  full  credit  for  this  assistance 
where  such  help  has  been  used.  The  subject  matter  is  necessarily 
much  condensed,  but  ample  references  have  been  included  to 
provide  collateral  reading.  In  fact  any  book  that  would  do  full 
justice  to  this  great  subject  would  be  many  times  too  large  for 
the  purpose  for  which  this  work  is  intended. 

The  writer  is  greatly  indebted  to  Mr.  John  H.  Barr,  Consulting 
Engineer  for  the  Remington  Typewriter  Co.,  Mr.  F.  P.  Halsey, 
Editor  Emeritus  of  the  American  Machinist,  Mr.  L.  P.  Alford, 
Editor  of  the  American  Machinist,  Mr.  E.  E.  Barney,  Superin- 
tendent of  the  Remington  Typewriter  Works,  Mr.  F.  R.  Whit- 
tlesey  of  the  General  Electric  Co.  and  Professors  A.  E.  Wells, 
C.  D.  Albert  and  John  Bauer  of  Cornell  University  for  assistance 
in  reading  the  manuscript  and  for  helpful  criticisms.  The  author 
will  be  grateful  for  suggestions  or  criticisms  that  will  make  the  book 
more  useful,  or  for  corrections  that  will  make  it  more  accurate. 

DEXTER  S.  KIMBALL. 
ITHACA,  N.  Y. 
September,  1913. 


CONTENTS. 


PAGE 
PREFACE vii 

CHAPTER  I.     ^ 
FUNDAMENTAL  AND  HISTORICAL 1 

1.  Fundamental  Principles. 

2.  Factory  System. 

3.  National  Ideals.  ff^\ 

4.  Systems  Preceding  Present  Methods. 

CHAPTER  II.     *-""" 
THE  INDUSTRIAL  REVOLUTION 8 

5.  The  Great  Inventions. 

6.  The  Character  of  these  Inventions. 

7.  Extension  of  the  new  Principles. 

CHAPTER  III. 

THE  EFFECTS  OF  THE  GREAT  INVENTIONS 15 

Sfoeparation  of  the  Worker  from  the  Tools  of  Industry. 
9^*-firegradation  of  Labor. 

10.  The  Extension  of  the  Field  of  Labor. 

11.  The  Elevation  of  Labor. 

12.  Increased  Production  and  Decreased  Cost. 

13.  Immediate  Results  of  the  Industrial  Revolution. 

CHAPTER  IV.      ^ 
CORRECTIVE  INFLUENCES 21 

14.  General. 

15.  Factory  Welfare  Work.  \/ 
16. 

17. 

18.  The  Arts  and  Crafts  Movement. 

19.  Industrial  Education. 


enera. 

Factory  Welfare  Work.  N/ 
Industrial  Legislation.  A, 

Labor  Unionism.  /   \ 


CHAPTER^ 


MODERN  INDUSTRIAL  TENDENCIES 34 

20.  Definitions. 

21.  Aggregation  or  Increase  in  Size. 

22.  Specialization. 

23.  Specialization  of  Men. 

24.  Advantages  and  Disadvantages  of  Specialization. 

25.  Standardization. 

26.  Interchangeability. 

27.  Advantages  and  Disadvantages  of  Standardization. 

28.  Division  of  Labor. 

29.  Division  of  Mental  Labor. 

30.  Summary.  . 

*-~*~3- 


Xll 


—CONTENTS 


CHAPTER  VI. 


FORMS  OF  INDUSTRIAL  OWNERSHIP 

31.  General. 

32.  Individual  Ownership. 

33.  Partnership. 

34.  Joint  Stock  Association. 

35.  Corporations.  *     »V-5*cA-xx*    -V 

36.  Capital  and  Capital  Stock. 

37.  Corporate  Organization.     Directorate. 

38.  Advantages  and  Disadvantages. 

39.  Cooperative  and  Governmental  Ownership. 


PAGE 
52 


CHAPTER  VII. 


PRINCIPLES  OF  ORGANIZATION — SYSTEM 


65 


40.  General  Principles. 

41.  Military  or  Line  Organization. 

42.  Staff  Organization. 

43.  Line  and  Staff  Organization. 

44.  Coordination  and  Executive  Control. 

45.  Administrative  Charts. 

46.  Orders  and  Returns. 

47.  Interpretation  of  Reports. 

48.  Committees  in  General. 

49.  The  Manufacturing  Committee. 

50.  The  Tool  Committee. 

51.  The  Shop  Conference. 

52.  Other  Committees. 

53.  Departmental  System. 


CHAPTER  VIII. 


PLANNING  DEPARTMENTS 

54.  General  Principles. 

55.  Functional  Foremanship. 

56.  Forming  the  Instruction  Card. 

57.  Order-of-work  Methods. 

58.  Data  on  Machines. 

59.  Data  on  the  Art  of  Cutting  Metal. 


93 


\ 


60.  Standard  Performances.  Time  and  Motion  Study. 

61.  Methods  of  Insuring  Performance. 

62.  Conclusion. 


CHAPTER  IX. 


PRINCIPLES  OF  COST  KEEPING 

63.  Need  of  Accurate  Costs. 

64.  The  Elements  of  Cost. 

65.  Classification  of  Expense. 

66.  Interest  and  Rent. 

67.  Insurance  and  Taxes. 

68.  Repairs  and  Betterments. 

69.  Depreciation. 

70.  Defective  Material  and  Spoiled  Work. 

71.  Experimental  Work. 

72.  The  Classified  Expense  Order-number  List. 


CONTENTS 


73.  The  Sources  of  Cost  Data. 

74.  Characteristics  of  Expense. 

75.  Distribution  on  Material  as  a  Basis. 
Distribution  on  Direct  Labor  as  a  Basis. 
Distribution  on  Prime  Cost  as  Basis. 
Distribution  on  Man-Hours  as  a  Basis. 
Distribution  by  Machine  Rate. 

The  Machine  Rate  and  Supplementary  Rate. 
Distribution  by  Production  Centers. 
Distribution  of  General  Expense. 
Summary. 


Xlll 
PAGE 


76. 
77. 
78. 
79. 
80. 
81. 
82. 
83. 


THE  DEPRECIATION  OF  WASTING  ASSETS. 

84.  Nature  of  Depreciation. 

85.  Wear  and  Tear  or  Maintenance. 

86.  Physical  Decay  or  Decrepitude. 

87.  Deferred  Maintenance. 

88.  Inadequacy. 

89.  Obsolescence. 

90.  Relation  of  Depreciation  to  Capital. 

91.  Relation  between  Depreciation  and  Repairs  and  Renewals. 

92.  Methods  of  Depreciation. 

93.  Classification  and  Rates  of  Depreciation. 

94.  Investment  and  Distribution  of  Depreciation. 

95.  Conclusion. 


139 


CHAPTER  XI. 


COMPENSATION  OF  LABOR 

96.  Basic  Features. 

97.  The  Primary  Pay  Systems. 

98.  Day  Work. 

99.  Defects  of  the  Day-work  Method. 

100.  Piecework. 

101.  Difficulties  and  Objections. 

102.  The  Halsey  Premium  Plan. 

103.  General  Features. 

104.  Advantages  and  Disadvantages. 

105.  The  Rowan  Modification  of  the  Halsey  Premium  Plan. 

106.  The  Taylor  Differential  Piece-Rate. 

107.  Advantages  and  Criticisms. 

108.  The  Gantt  Bonus  Plan. 

109.  Advantages  and  Disadvantages. 

110.  The  Emerson  Efficiency  Plan. 
Re'sume'. 

Profit-sharing  Methods. 


168 


PURCHASING,  STORING  AND  INSPECTION  OF 


113.  Sources  of  Supply. 

114.  Purchasing. 

115.  Functions  of  Stores  and  Stock. 

116.  Store-room  Methods. 

117.  Economical  Use  of  Material. 

118.  Reasons  and  Basis  for  Inspection. 


RIALS.  . ,  199 


xiv  CONTENTS 

119.  Inspection  of  Purchases.  PAGE 

120.  Inspection  during  Manufacture. 

I   121.  Performance  and  Assembly  Tests. 

\  122.  Inspection  in  General. 


CHAPTER  XIII. 

LOCATION,  ARRANGEMENT  AND  CONSTRUCTION  OF  INDUSTRIAL  PLANTS    227 

123.  Industrial  Engineering. 

124.  Location  of  Plant.  , 

125.  Adaptation  of  Building. 

126.  Arrangement  of  Equipment. 

127.  Sequence  of  Processes  —  Routing. 

128.  Building  Construction. 


CHAPTER  XIV. 

RESUME  —  THEORIES  OF  MANAGEMENT 245 

129.  Business  Failures. 

130.  Scientific  Methods. 

131.  Economic  Principles. 

132.  Human  Relations. 

133.  Economic  Results. 

INDEX..  269 


PRINCIPLES    OF 
INDUSTRIAL    ORGANIZATION 


CHAPTER   I. 

FUNDAMENTAL  AND   HISTORICAL. 

1.  Fundamental  Principles.  The  total  wealth  that  any  people 
can  create  is  governed  primarily  by  two  factors: 

(1)  The  natural  resources  of  the  country  that  they  inhabit. 

(2)  The   tools   of   production,   mental   and    physical,    which 
they  possess  for  developing  these  resources. 

Thus,  savages  living  in  a  rich  and  fertile  territory  do  not  rise 
above  the  level  permitted  by  their  tools  of  production  while 
nations,  such  as  Germany,  with  comparatively  small  resources 
may  easily  occupy  a  foremost  position  among  civilized  peoples 
because  of  their  highly  developed  industrial  processes.  The 
progress  of  civilization,  in  fact,  is  measured  by  the  character  of 
the  tools  which  man  has  developed;  and  in  a  general  way  we 
recognize  this  when  we  speak  of  the  Stone  Age,  the  Bronze  Age, 
the  Age  of  Iron,  and  the  Age  of  Steel.  It  is  not  unbelievable 
that  we  shall  yet  develop  another  metallic  basis  which  shall 
serve  as  an  index  for  a  higher  plane  of  civilization. 

The  average  wealth,  and  consequent  average  physical  comfort 
and  mental  development,  which  any  people  can  enjoy  is  governed, 
for  given  natural  resources  and  given  productive  powers,  by  the 
industrial  system  under  which  production  is  carried  on;  and 
the  industrial  system  is  in  all  cases  closely  interwoven  with 
the  ideals  of  the  ruling  classes  and  the  organization  of  society. 
In  the  ancient  Egyptian  and  Babylonian  civilizations,  for  in- 
stance, the  tools  of  production  were  so  primitive  that  the  output 
per  individual  was  very  small  even  with  great  natural  advantages. 
As  a  consequence,  when  each  individual  producer  had  contrib- 


2       RNCIPLEFINDUSTRIAL   ORGANIZATION 

uted  his  share  toward  the  support  of  the  necessities  of  a  civilized 
state,  there  was  little  left  for  him  or  his  family  and  the  average 
well-being  was  very  low.  It  may  be  taken  as  axiomatic  that 
in  any  civilized  community  the  state  of  the  actual  worker  ap- 
proaches that  of  slavery  as  his  tools  are  more  and  more  primitive 
even  though  the  upper  or  non-producing  classes  may  enjoy  a 
very  high  state  of  mental  development  and  physical  comfort. 
The  older  nations  were  of  necessity,  therefore,  supported  by  vast 
numbers  of  low-paid  producers  whose  state  bordered  on,  or 
actually  was,  that  of  slavery;  but  one  can  readily  conceive  of 
civilizations  possessing  the  highest  type  of  tools  and  operating 
them  by  slave  labor.  Highly  developed  tools  of  production  make 
possible  a  high  average  state  of  mental  development  and  physical 
comfort;  but  the  realization  of  this  average  depends  on  national 
ideals  and  the  social  and  industrial  organization  by  which  the 
wealth  produced  is  distributed.  Now,  naturally,  the  modern 
nations  that  have  made  the  greatest  advances  industrially  have 
also  acquired  the  highest  national  ideals;  and  it  is  in  these 
we  find  an  ever-increasing  tendency  to  inquire  carefully  into  the 
social  effects  of  all  industrial  methods,  new  or  old,  with  the  view 
of  attaining  the  highest  possible  degree  of  general  comfort  and 
enlightenment. 

It  is  obvious  that,  in  general,  for  a  given  result,  the  skill 
of  the  worker  must  be  increasingly  great  as  his  tools  become 
decreasingly  primitive  and  ineffective.  We  are  accustomed  to 
speak  of  production  with  primitive  tools  and  high  manual  skill  as 
handicraft.  It  is  to  be  noted,  however,  that  skill  of  hand  may  be 
necessary  even  with  very  refined  tools  as  in  the  operation  of 
some  of  our  metal-working  machines.  Usually  the  term  handi- 
craft is  interpreted  as  synonymous  with  hand  tools  but  even  in 
very  ancient  times  machines  such  as  looms  were  in  use  though 
their  operation  required  skill  of  hand.  In  general,  however, 
even  such  machines  were  within  the  reach  of  all  and  industry 
under  a  handicraft  system  is  essentially  individual  and  not  de- 
pendent upon  congregated  effort. 

2.  Factory  System.  By  the  term  manufacturing  we  usually 
refer  to  the  production  of  goods  by  means  of  congregated  labor 


FUNDAMENTAL  AND  HISTORICAL  3 

and  the  use  of  machinery.  These  characteristics  are  not,  however, 
distinctive  of  modern  methods  as  both  can  be  and  were  used 1  by 
handicraftsmen  before  the  modern  era  of  production  began. 
The  Egyptians  and  Romans  were  well  aware  of  the  advantage 
of  congregated  labor,  and  machinery  was  in  use  in  England 
and  on  the  Continent  before  the  birth  of  modern  methods. 
Nor  does  the  principle  of  division  of  labor  explain  the  difference 
between  old  and  new  methods,  though  some  modern  writers  have 
fallen  into  the  error  of  this  assumption.  Division  of  labor  is  as 
old  as  humanity;  it  is  an  essential  feature  of  civilization  and 
was  used  in  some  detail  by  the  old  handicraftsman.  The  new 
methods  have  enabled  us  to  utilize  more  fully  the  advantages  of 
congregated  labor  and  division  of  labor,  but  these  are  not  the 
essential  features  of  the  change,  which  will  be  discussed  more 
fully  later  on.  Handicraft  does,  however,  carry  with  it  the  idea 
of  a  limited  output  because  of  the  primitive  nature  of  the 
tools  employed,  while  manufacturing  is  essentially  synonymous 
with  production  in  quantity.  Handicraft,  moreover,  carries  with 
it  the  idea  of  a  permanent  state  of  tools  and  production,  and  a 
consequent  permanent  social  structure.  Manufacturing,  on  the 
other  hand,  is  synonymous  with  rapid  change  in  productive 
methods  and  consequent  change  in  the  social  and  economical 
conditions. 

By  the  term  factory  system  we  refer  particularly  to  the 
modern  method  by  which  men  organize  labor  and  tools  for  the 
production  of  commodities.  There  have  been  other  forms  of 
industrial  organization,  however,  which  have  varied  greatly  with 
changing  time  and  place.  Previous  to  about  one  hundred  and 
fifty  years  ago,  all  productive  organization  of  which  we  have 
any  record  was  based  on  handicraft.  In  most  instances  the 
organization  was  extremely  simple,  because  handicraft  is 
essentially  individual.  The  Egyptians,  however,  had  factories 
such  as  that  at  Canopus  where  pottery  was  manufactured, 
and  the  Romans  had  a  well-organized  system  of  factories  for  the 
making  of  armor.  Factories  of  considerable  size  also  existed  in 

1  See  Modern  Factory  System,  by  W.  Cooke  Taylor,  p.  3.  See  also  History 
of  the  Factory  System,  by  W.  Cooke  Taylor. 


4     PRINCIPLES   OF   INDUSTRIAL   ORGANIZATION 

England  and  on  the  continent  during  the  Middle  Ages.1  These 
factories,  while  possessing  the  characteristics  of  congregated 
labor  and  perhaps  in  many  instances  including  machines,  were, 
after  all,  simple  collections  of  handicraft  processes  with  some 
division  of  labor.  They  were  not  comparable  with  modern 
factories  so  far  as  the  systematic  organization  of  labor  or  of 
processes  is  concerned. 

3.  National  Ideals.     It  is  to  be  especially  noted  that  national 
ideals,  popular  opinion  or  some   similar  influence  has   always 
greatly  influenced  industrial  organization.     Thus,  in  India  the 
caste  system  for  countless  years  prohibited  all  forms  of  factories 
and  all  production  was  by  simple  handicraft,  definite  kinds  of 
work  being  assigned  to  particular  classes  of  people.     Under  the 
Roman  system  the  Armorers  or  Fabrica  were  a  class  of  artisans 
set  apart  for  this  sole  purpose  and  they  could  not  change  their 
calling.     It  was  a  form  of  state-supported  and  regulated  slavery. 
History  abounds  with  similar  instances  of  the  effect  of  public 
opinion  or  national  necessity  upon  the  method  by  which  the 
nation  was  provided  with  the  necessities  of  life.     While,  there- 
fore, the  essential  features  of  our  modern  system  will  probably 
continue  indefinitely,  it  need  not  be  a  matter  of  surprise  or  alarm 
that  many  changes  and  regulations  have  been  made  and  will  be 
made  in  deference  to  public  opinion  or  national  necessity. 

4.  Systems   Preceding  Present   Methods.      Our  present  in- 
dustrial methods  originated  in  England  during  the  latter  part  of 
the  eighteenth  century  and  it  is  important  to  understand  the 
industrial  methods  in  use  there  just  preceding  the    change  to 
modern  methods.     Under  the  Feudal  System  of  the  Middle  Ages 
men  were  either  bound  to  the  landed  proprietors  of  the  soil  or,  if 
independent  craftsmen,  they  were  held  together  by  the  strong 
bonds   of  Trade   Guilds    (the  ancient  Trades   Unions).     These 
influences  while  hampering  the  personal  freedom  of  the  workman 
also  protected  him  in  a  measure  against  the  oppression  of  in- 
fluences external  to  his  calling  or  surroundings.     With  the  decline 
of  the  Feudal  System,  and  the  growth  of  personal  liberty,  these 
restraining    and    protective    influences    gradually    disappeared. 

1  See  The  History  of  the  Factory  System,  by  W.  Cooke  Taylor. 


FUNDAMENTAL   AND  HISTORICAL  5 

There  was  also  an  ever-increasing  tendency  to  pay  dues  and 
reward  labor,  not  by  labor  or  by  the  direct  product  of  labor,  but 
in  money;  and  long  before  the  rise  of  the  modern  system  of 
production  this  had  resulted  in  a  considerable  wage-earning 
class.  It  is  to  be  specially  noted,  that  this  wage-earning  class, 
while  free  to  sell  their  labor  as  they  pleased,  were  totally  unpro- 
tected either  by  law  or  by  mutual  organizations  of  any  kind  such 
as  had  formerly  existed  or  have  since  come  into  existence. 

Industry  had  not  as  yet  assumed  a  definite  form,  but  was 
passing  through  a  transitional  stage  in  which  there  existed  three 
clearly  defined  methods  of  production.  First,  there  was  the 
ancient  method  of  isolated  handicraft  which  had  existed  from 
earliest  times.  This  form  of  labor  had  just  been  rendered 
unorganized  and  free  from  restraint  or  protection  by  the  downfall 
of  Feudal  influences.  In  this  method  the  producing  unit  was 
(and  still  is,  for  the  system  still  survives  in  a  feeble  way)  the 
workman  himself,  and  he  and  his  family  were  dependent  solely 
on  his  efforts. 

Second,  there  was  what  has  been  called  the  Domestic  System 
which,  as  can  readily  be  seen,  grew  directly  out  of  the  decay 
of  the  Feudal  System.  In  this  form  of  industry  the  house- 
holder was  primarily  an  agriculturist  and  he  and  his  family  tilled 
their  small  farm.  At  such  times,  however,  as  he,  or  any  member 
of  his  family,  was  not  so  engaged  they  practiced  some  handicraft 
calling  as  weaving,  or  spinning;  implements  for  which  were 
installed  in  some  part  of  his  house,  and  were  his  own  property. 
He  might  even  hire  assistance  for  either  or  both  of  his  activities, 
and  the  product  of  his  spinning  wheels  or  looms,  in  excess  of  what 
was  needed  at  home,  was  disposed  of  to  dealers.  This  system  was 
a  very  natural  outgrowth  of  the  changed  conditions,  and  was  the 
most  important  method  of  production  just  previous  to  the  great 
change. 

The  third  form  of  industrial  organization  then  existing  was 
the  forerunner  of  our  modern  factory  system.  In  this  method 
the  production  was  carried  on  by  a  controlling  owner,  or  principal, 
who  hired  employees  to  operate  machines  or  furnish  hand  labor 
in  exchange  for  wages.  The  fact  that  the  industry  was  usually 


6     PRINCIPLES   OF   INDUSTRIAL   ORGANIZATION 

carried  on  in  the  employer's  house  does  not  alter  the  fact  that 
these  establishments  were  factories  in  the  full  sense.  We  have 
well-authenticated  records  of  some  of  these  old  factories,  as 
for  instance,  that  of  "  Jack  of  Newbury"1  whose  works  employed 
over  one  thousand  persons.  This  form  of  industry  grew  up  by 
the  side  of  the  Domestic  System  and  perhaps  grew  out  of  a 
natural  extension  of  that  system.  It  is  not  to  be  confused, 
however,  with  its  successor,  the  modern  factory  system.  True, 
it  had  many  of  the  defects  of  the  modern  system,  and  we  find 
ample  record  of  legislation  aimed  at  the  oppressive  methods  of 
master  cloth  makers  before  the  present  era.  It  is  possible  that  in 
time  this  system  would  have  supplanted  the  Domestic  System 
entirely  in  all  forms  of  manufacturing  industry  with  consequent 
increased  discontent  of  the  masses  and  capitalistic  troubles 
similar  to  those  we  now  have. 

The  condition  of  the  common  people  just  previous  to  the 
great  change  to  be  discussed  should  also  be  carefully  noted. 
Economic  conditions  were  such  that  they  found  a  ready  market 
for  their  output;  the  demand  exceeding  the  supply  and  hence 
they  were  prosperous.  They  enjoyed  a  large  measure  of  personal 
freedom  and  independence,  the  tools  of  production  being  more 
easily  obtainable  than  at  present.  These  apparently  satisfactory 
conditions  have  been  much  exaggerated  in  making  comparisons 
with  present-day  conditions.  Many  writers  and  poets2  have 
written  and  sung  of  this  so-called  "  Golden  Age  "  as  one  of  pas- 
toral delight  and  content.  As  a  matter  of  fact  and  history  the 
condition  of  the  common  working  people,  viewed  from  a  present- 
day  standpoint,  was  wretched  indeed.  Housed3  in  unsanitary 
hovels,  uneducated  and  loose  in  morals,  a  prey  to  epidemics  and 
plagues,  their  condition  would  be  envied  by  few  workmen  to-day. 
Whatever  evils  the  modern  factory  system  has  brought  in  its 
train,  it  must  be  credited  with  making  possible  a  vast  improve- 
ment in  the  workers'  environment.  It  cannot  be  said,  however, 
that  it  has  always  improved  the  workers'  bodily  vigor;  but  this 

1  See  Modern  Factory  System,  by  Whatley  Cooke  Taylor,  p.  49. 

2  See  The  Deserted  Village,  by  Oliver  Goldsmith. 

3  See  The  Factory  System  of  the  United  States,  by  Carroll  D.  Wright  in 
Report  of  the  Manufacturers  of  the  United  States  at  the  10th  Census. 


FUNDAMENTAL  AND  HISTORICAL  7 

has  not  been  the  fault  of  the  system  so  much  as  it  has  been  due  to 
the  ignorance  and  greed  of  those  controlling  it. 

It  is  not  likely,  however,  that  these  changes  could  ever  have 
come  about  to  a  degree  comparable  with  modern  conditions  since 
these  old  factories  were  based  on  handicraft,  the  limitations  of 
which  we  have  already  discussed.  Nevertheless,  enough  ex- 
perience was  had  with  handicraft  factories  to  show  that  certain 
social  changes,  for  which  our  modern  factory  system  is  wholly 
blamed,  were  even  then  under  way  and  that  they  are  an  integral 
part  of  the  change  from  the  state  where  agriculture  was  the 
principal  occupation  with  manufacturing  industry  a  subsidiary 
matter,  to  one  where  these  two  great  branches  are  entirely 
divorced  and  manufacturing  is  carried  on  as  a  separate  venture 
with  congregated  labor,  a  wage-earning  class  and  capitalistic 
support  and  control. 

REFERENCES: 

Modern  Factory  System,  by  W.  Cooke  Taylor. 
Industrial  History  of  England,  by  H.  de  B.  Gibbins. 
History  of  the  Factory  System,  by  W.  Cooke  Taylor. 


CHAPTER  II. 

THE   INDUSTRIAL  REVOLUTION. 

5.  The  Great  Inventions.  The  industrial  conditions  described 
in  the  preceding  chapter  prevailed  in  England,  and  for  that 
matter  in  many  parts  of  Continental  Europe,  up  to  about  the 
middle  of  the  eighteenth  century.  It  is  a  somewhat  remarkable 
fact  that  mankind  had  dwelt  on  the  earth  in  a  civilized  state  so 
long  and  had  yet  made  such  a  very  small  advance  in  industrial 
methods.  The  great  callings  were  agriculture  and  the  textile 
industries  and  in  both  of  these  the  implements  were  exceedingly 
primitive,  most  of  them  having  changed  but  little  in  countless 
thousands  of  years  though  in  use  (and  still  in  use  for  that  matter) 
by  all  civilized  and  by  many  semi-civilized  nations.  About 
this  time  (1750),  however,  there  began  a  simultaneous  movement 
in  England  and  on  the  Continent  looking  toward  the  improve- 
ment of  the  implements  of  spinning  and  weaving.  It  is  difficult 
to  fix  exact  dates  or  even  to  give  proper  credit  for  the  early 
conceptions  of  these  improvements.  Undoubtedly,  many  men 
had  independently  stumbled  upon  or  thought  out  these  new 
methods  but  had  been  unable  to  develop  them  into  practical 
operating  machines.  In  England  a  great  incentive  was  given 
to  invention  by  the  offer  of  the  government,  of  prizes  of  50  and 
25  pounds  respectively  for  the  first  and  next  best  improved 
method  of  spinning.  The  government's  interest  lay  in  the  fact 
that  the  policy  of  foreign  expansion,  then  under  way,  made  it 
very  desirable  to  secure  more  textiles  for  export,  and  the  weak 
part  of  the  industry  was  the  spinning,  which  was  then  done  on  the 
primitive  wheel.  The  many  unsuccessful  efforts  to  improve  spin- 
ning and  weaving  culminated  in  the  latter  part  of  the  century 
in  what  are  usually  known  as  the  "  Four  Great  Inventions."  In 
1770  James  Hargreaves,  a  weaver,  patented  the  "  spinning- 
jenny,"  which  consisted  of  a  frame  with  a  number  of  spindles 
side  by  side  so  that  many  threads  could  be  spun  at  once.  In  1771 

8 


THE   INDUSTRIAL  REVOLUTION 


HARGREAVE'S  SPINNING  JENNY 


SIR  RICHARD  ARKWRIGHT'S  SPINNING  MACHINE 

Patented  1769 


CROMPTON'S  MULE  JENNY 


10     PRINCIPLES   OF   INDUSTRIAL   ORGANIZATION 

Richard  Arkwright,  originally  a  barber,  operated  a  mill  in  which 
he  successfully  used  his  "  water-frame,"  so-called  because  it  was 
driven  by  water  power,  and  the  term  "  water-twist,"  as  the  name 
of  the  product,  still  survives.  In  1779  both  these  inventions 
were  superseded  by  the  invention  of  the  "  Mule  "  by  Samuel 
Crompton,  a  spinner,  whose  machine  combined  all  the  good 
features  of  his  predecessors  and  was  so-called  as  being  a  hybrid 
offspring  of  these  former  inventions.  Finally,  the  invention 
of  the  power  loom  in  1785,  by  Dr.  Edmund  Cartwright,  a 
Kentish  parson,  gave  to  the  weaving  industry  what  these  other 
other  inventions  had  given  to  the  spinning  industry. 

These  inventions,  of  themselves,  in  time  would  have  revo- 
lutionized the  textile  industry;  but  the  process  was  greatly 
hastened  by  the  development  of  the  steam  engine  by  James  Watt 
in  1769.  This  new  motor  gave  the  unlimited  power  and  per- 
mitted the  choice  of  location  that  allowed  these  new  methods  to 
spread  with  great  rapidity,  and  the  overthrow  of  the  old  methods 
was  sudden,  violent  and  almost  complete.  This  very  significant 
change  in  manufacturing  is  known  as  "  The  Industrial  Revo- 
lution "  and  the  principles  involved,  although  first  applied  ex- 
tensively to  the  textile  industry,  only,  spread  with  amazing 
rapidity  to  all  kinds  of  industry  changing  and  stimulating  them 
to  a  very  remarkable  degree. 

6.  The  Character  of  these  Inventions.  Viewed  from  the 
standpoint  of  modern  machine  construction  these  new  machines 
were  neither  complex  nor  efficient,  and  their  great  importance 
lies  in  the  application  of  the  principles  they  involved.  These 
principles  are,  as  a  rule,  not  well  understood  and  are  often 
confused  with  other  phenomena  incident  to  the  change.  For 
instance,  this  change  is  often  spoken  of  as  a  change  to  machine 
industry.  Now,  as  we  have  seen,  machines  were  in  use  in  the 
textile  industry  preceding  the  great  inventions,  and  factories 
and  factory  systems  of  manufacture  had  already  appeared. 
Nor  is  the  extension  of  the  principle  of  division  of  labor  the 
fundamental  change  but  rather  a  corollary  of  the  new  methods. 
The  real  change  in  manufacturing  methods  can  perhaps  be 
best  studied  by  taking  a  simple  fundamental  case  as  follows: 


THE  INDUSTRIAL  REVOLUTION 


11 


Suppose  it  be  desired  to  drill  four  holes  h,  h,  h,  h  in  a  number 
of  plates  like  A,  Fig.  1,  so  that  they  bear  a  certain  fixed  relation 
to  the  edges  of  the  plate ;  and  suppose  the  operator  to  be  equipped 
with  the  ordinary  drilling  machine  which  guides  the  drill  so 
that  it  pierces  the  plate  squarely.  To  drill  these  holes  in  one 
plate,  with  any  degree  of  accuracy,  requires  a  high  degree  of 


1. 


skill  on  the  part  of  the  operator;  and  to  drill  any  number  of 
such  plates  so  that  the  spacing  of  the  holes  in  them  will  corre- 
spond closely  with  those  in  the  first  plate  requires  a  very  high 
degree  of  manual  skill,  considerable  time  per  plate,  and  is  a 
costly  operation. 

Suppose,  however,  a  skilled  workman  makes  a  so-called 
"  drilling  jig  "  (B,  Fig.  1)  in  which  the  plate  A  can  be  securely 
clamped  by  set-screws  S  and  in  which  all  the  plates  can  in  turn 


12     PRINCIPLES   OF   INDUSTRIAL   ORGANIZATION 

be  clamped  in  exactly  the  same  position.  The  plate  B  contains 
four  holes  hf,  ti ',  hf,  h',  which  have  been  very  carefully  located 
to  correspond  with  the  required  location  of  the  holes  in  A  and 
when  A  is  held  in  B  these  holes  h',  h',  hf,  h'  are  directly  above 
the  required  location  of  holes  h,  h,  h,  h.  The  holes  in  B  are 
surrounded  by  hardened  steel  rings  or  "  bushings,"  so-called, 
to  prevent  the  drill  D  from  unduly  wearing  them  and  D  fits  the 
holes  in  these  bushings  accurately  and  closely. 

Now,  it  is  evident  that  almost  any  unskilled  person  can  drill 
the  plate  A,  when  held  in  B,  as  accurately  as  the  most  skilled 
workman  can  without  it.  Further,  he  cannot  drill  the  plate  inac- 
curately if  B  is  accurately  made.  True,  he  must  have  a  slight 
amount  of  training  in  handling  the  drilling  machine,  but  this  is 
small  and  soon  acquired.  The  accuracy  of  the  work  no  longer 
depends  on  the  skill  of  the  operator  but  on  the  accuracy  of  his  tools. 

The  principle  illustrated  above  has  been  aptly  called  u  The 
Transfer  of  Skill  "*  and  it  is  to  be  especially  noted  that  this 
principle  has  nothing  to  do  with  division  of  labor,  though  as 
.can  be  seen  it  allows  an  extension  of  the  same.  Nor  is  the 
principle  inherently  applicable  to  machines  alone;  it  can  be  and  is 
applied  to  hand  methods.  True,  most  machines  are  constructed 
with  this  end  in  view,  the  drilling  machine  mentioned  above,  for 
instance,  having  this  characteristic  in  so  far  as  guiding  the 
drill  vertically  is  concerned. 

It  is  evident  that  for  a  given  operation  the  more  skill  that  is 
transferred  to  the  machine  the  less  is  required  in  the  operator. 
When  nearly  all  the  skill  has  been  so  transferred,  but  the  machine 
still  requires  an  attendant,  it  is  called  a  semi-automatic  machine. 
Turret  lathes  are  excellent  examples  of  this  class  of  machinery. 

In  drilling  the  plate  A  without  the  jig  the  skilled  mechanic 
must  expend  thought  as  well  as  skill  in  properly  locating  the 
holes.  The  unskilled  operator  need  expend  no  thought  regarding 
the  location  of  the  holes.  That  part  of  the  mental  labor  has 
been  done  once  for  all  by  the  toolmaker.  It  appears,  therefore, 

1  Strictly  speaking  the  term  "skill"  refers  to  either  mental  or  manual 
ability.  It  has  seemed  expedient  here  to  use  it  in  the  more  commonly  accepted 
sense  of  skill  of  hand. 


THE  INDUSTRIAL  REVOLUTION  13 

that  a  "  transfer  of  thought1  or  intelligence  "  can  also  be  made 
from  a  person  to  a  machine.  If  the  quantity  of  parts  to  be  made 
is  sufficiently  large  to  justify  the  expenditure  it  is  possible  to 
make  machines  to  which  all  the  required  skill  and  thought  have 
been  transferred  and  the  machine  does  not  require  even  an  at- 
tendant. Such  machines  are  known  as  full  automatic  machines. 
Automatic  screw  machines  are  excellent  examples  of  a  complete 
transfer  of  skill  and  thought.  Care  should  be  taken  to  dis- 
tinguish clearly  between  transmission  of  intelligence,  as  illustrated 
in  drawings,  specifications  and  written  or  spoken  communica- 
tion, in  general,  between  men  and  the  transfer  of  intelligence 
or  thought  from  a  skilled  man  to  a  machine.  These  principles, 
transfer  of  skill  and  transfer  of  thought,  lie  at  the  bottom  of 
modern  industrial  methods.  Under  former  and  simpler  methods 
of  manufacture  the  machine  was  an  aid  to  the  worker's  skill, 
the  amount  of  skill  that  had  been  transferred  being  very  small. 
In  the  new  machines  the  transfer  of  skill  and  thought  may  be 
so  great  that  little  or  none  of  these  are  required  of  the  attendant 
worker. 

7.  Extension  of  these  Principles.  As  before  noted  it  is 
difficult  to  ascribe  exact  credit  for  these  improvements.  They 
assumed  great  importance  first  in  the  textile  industries,  since 
these  were  the  most  important  manufacturing  interests  in 
England  at  that  time.  But  similar  changes  took  place  either 
simultaneously  or  shortly  after  in  all  lines  of  work,  especially  in 
the  metal-working  industries.  In  a  series  of  articles  in  the  Engi- 
neering Magazine  for  1899  Henry  Roland  gives  a  very  interesting 
and  instructive  account  of  the  rise  of  these  principles  in 
machine  tools  in  which  he  credits  Samuel  Bentham  with  first 
fully  comprehending  the  full  significance  of  the  toolmakers'  art 
about  1791.  The  slide  rest  for  accurately  guiding  cutting  tools, 
invented  by  Henry  Maudslay  of  England,  the  turret,  invented 
by  Henry  Stone  of  New  Hampshire,  and  the  combination  of 
these  two  elements  into  the  automatic  lathe  by  Christopher 

1  The  modern  player-piano  is  an  excellent  example  of  transfer  of  skill  and 
thought.  The  thought  of  the  composer  is  transferred  quite  accurately  but 
the  transfer  of  playing  skill  is  imperfect.  Note  that  composing  and  playing 
are  not  necessarily  the  accomplishments  of  any  one  man. 


14    PRINCIPLES   OF   INDUSTRIAL   ORGANIZATION 

Miner  Spencer  of  Connecticut  were  the  great  epoch-making 
improvements  in  machine  construction.  Perhaps  invention  is 
not  the  correct  term  to  use  as,  no  doubt,  all  of  these  elements  had 
been  thought  of  long  before  by  other  men;  but  to  these  men  at 
least  belongs  the  credit  of  making  them  working  possibilities. 
These  three  elements,  namely,  the  slide  rest,  the  turret  and 
Spencer's  "  brain  "  or  cam  wheel  for  operating  the  combination 
of  the  first  two  are  perhaps  more  used  in  complex  automatic 
machinery  than  any  other  machine  elements. 

REFERENCES  : 

Modern  Factory  System,  R.  W.  Cooke  Taylor. 
History  of  the  Factory  System,  R.  W.  Cooke  Taylor. 
Industrial  History  of  England,  H.de  B.  Gibbins. 
The  Manufacturing  Population  of  England,  P.  Gaskell. 
The  Revolution  in  the  Machine  Shop.     Henry  Roland  in  Engineering 
Magazine,  1899. 


CHAPTER  III. 

THE  EFFECTS   OF  THE   GREAT  INVENTIONS. 

8.  Separation  of  the  Worker  from  the  Tools  of  Industry.     The 
effects  of  the  great  inventions  were  many  and  far-reaching  as 
well  as  complex.     A  consideration  of  the  most  important  of  these 
is  necessary  to  a  full  understanding  of  modern  conditions.     The 
first,  and  one  of  the  most  significant  effects,  was  to  separate 
the  worker  from  ownership  of  the  tools  of  industry.     No  longer 
was  it  possible  for  almost  anyone  to  secure  the  implements  of  his 
trade.     Capital  was  now  required  both  to  build  these  new  im- 
plements and  to  provide  .power  to  operate  them.     The  new 
methods,  therefore,  hastened  the  change  foreshadowed  by  the 
old  handicraft  factolies^wh^re  the  industry  was  supported  and 
controlled  by  capital  and  the  worker  was  a  wage  earner  pure 
and  simple  and  unsupported  by  an  auxiliary  industry  such  as 
agriculture.  ^ 

9.  Degradation  of  Labor.     Following  closely  on  the  above 
evolution  the  textile  worker  found  that  the  skill  which  he  had 
already  acquired  was  useless  as  a  marketable  product  since  the 
new  machines  could  be  operated  by  unskilled  workmen,  in  many 
cases  young  boys  and  girls  being  sufficiently  strong  and  intelli- 
gent.    In  some  cases,  in  fact,  his  handicraft  trade  soon  ceased 
to  be  an  industrial  factor  so  radical  was  the  change  in  method. 
Since  industry  was  limited,  and  furthermore,  since  it  is  difficult 
for  a  mechanic   to   change  his   calling,   practically  the  entire 
textile  producing  population  was  degraded;   that  is  the  market 
value  of  their  labor  was  reduced  to  that  of  the  unskilled  girls 
and  boys  who  could  operate  the  new  machines.     This  so-called 
degradation  of  labor  is  one  of  the  first  results  of  the  introduction 
of  labor-saving  machinery.     In  the  beginning  its  effect  was  much 
more  marked  than  at  any  time  since,  because  almost  the  entire 
industrial  field,  which  was  limited,  was  almost  instantly  affected. 

15 


16     PRINCIPLES   OF   INDUSTRIAL   ORGANIZATION 

As  will  appear,  all  classes  of  men  are  benefited,  in  the  long  run,  by 
methods  that  multiply  productive  power;  but  these  beneficial 
effects  often  affect  others  outside  of  the  industry  in  which  the 
change  is  made  at  the  expense  of  those  directly  concerned,  and 
for  this  reason  the  worker  is  naturally  opposed  to  the  intro- 
duction of  labor-saving  machinery  that  directly  affects  his 
calling. 

10.  The  Extension  of  the  Field  of  Labor.     The  new  methods  of 
production  have  enabled  many  unskilled  people  to  take  an  im- 
portant part  in  many  industrial  fields  formerly  occupied  solely  by 
skilled  workers.     To-day  in  nearly  every  large  manufacturing  in- 
dustry the  unskilled  or  semi-skilled  labor  greatly  outnumbers  the 
skilled,  and  product  of  great  accuracy  and  high  finish  is  turned 
out  by  such  organizations.     This  principle  of  extension  of  the 
field  of   labor  is  a  broad  one.     As  more  and  more  skill   and 
thought  have  been  transferred  to  hand  and  machine  tools  it  has 
become  increasingly  easy  for  men  and  women  to  take  part  in 
what  was  formerly  entirely  skilled  industry.     The  actual  pro- 
duction of  shoes,  watches,  typewriters,  etc.,  is  conducted  almost 
entirely  by  semi-skilled  labor. 

This  influence  has  not  been  confined  to  industries  that  already 
existed  but  has  made  possible  the  existence  of  many  new  in- 
dustries. The  telephone,  the  sewing  machine  and  countless 
other  articles  now  considered  necessities  of  daily  life  are  obtain- 
able by  the  majority  of  people  solely  because  the  new  methods  of 
production  have  multiplied  and  cheapened  production,  the  de- 
mand for  these  articles  opening  up  new  fields  of  manufacturing 
with  consequent  farther  extension  of  the  field  of  labor. 

11.  The  Elevation  of  Labor.     While  the  introduction  of  these 
new  methods  may  degrade  certain  classes  of  labor  they  may,  on 
the  other  hand,  elevate  others.     The  skilled  mechanic  that  has 
been  engaged  in  drilling  the  plate  in  Fig.  1  is  not  necessarily 
degraded  by  the  introduction  of  the  drilling  jig,  because  his  skill 
can  be  utilized  to  make  such  tools;    and  this  class  of  labor, 
namely,  the  skilled  workers  in  the  metal  trades,  has,  on  the  whole, 
usually   been   benefited   rather   than    otherwise,    by    the    new 
methods,  though  at  times  trying  periods  of  readjustment  have 


THE  EFFECTS  OF   THE   GREAT  INVENTIONS     17 

ensued  upon  the  introduction  of  labor-saving  machinery  into 
their  own  industry. 

Again  the  unskilled  worker  who  is  taken  from  low-paid  menial 
employment  and  taught  to  operate  a  semi-automatic  machine 
can  usually  earn  more  money  than  formerly  and  be  elevated  to  a 
higher  plane.  The  history  of  manufacturing  in  New  England 
shows  very  clearly  the  absorption  into  the  manufacturing 
industries  of  the  successive  waves  of  immigration  of  unskilled 
labor  that  have  from  time  to  time  moved  into  these  states. 

12.  Increased  Production  and  Decreased  Cost.     Manifestly 
these  new  methods  have  multiplied  man's  productive  power 
many  fold,  enabling  him  to  produce  more  per  unit  of  time,  with  a 
corresponding  reduction  in  the  cost  of  production.     This  feature, 
and  the  principles  of  elevation  of  labor  and  extension  of  the 
field  of  labor  more  than  compensate  in  the  long  run  for  the 
effects  of  degradation  of  labor,  though  as  before  noted  the  many 
benefit  at  the  expense  of  the  few.     Human  progress  apparently 
cannot  take  place  without  someone  suffering.     Theoretically  all 
should  be  greatly  benefited  by  these  improved  methods,  and  the 
reason  why  such  has  not  always  been  the  case  is  not  because  of 
the  processes  themselves,  but  because  their  net  result  is  to  increase 
production  solely.     They  do  not  carry  with  them  inherently 
any  influences  tending  to  rearrange  the  distribution  of  the  in- 
creased profits  derived  from  them,  nor  to  offset  the  effects  of 
the  fierce  competition  rendered  possible  because  of  this  increase 
in  productive  capacity.     Invention  and  its  result  always  act 
quickly;    social  and  political  changes  move  more  slowly.     The 
natural  law  of  supply  and  demand  operated  quickly  under  the 
older  and  simpler  methods.     The  complexity  of  modern  methods 
tends  to  make  these  laws  act  much  more  sluggishly.     It  is  only 
after  a  struggle  lasting  over  a  hundred  years  that  there  is  hope, 
even,  of  instituting  reforms  that  will  in  a  measure  restore  equi- 
librium of.  distributive  methods  so  badly  distorted  by  the  re- 
sults of  the  great  inventions. 

13.  Immediate  Results  of  the  Industrial  Revolution.     It  will 
be  remembered  that  at  the  time  of  this  great  industrial  change 
the  laborer  was  unprotected  by  either  legal  statutes  or  mutual 


18     PRINCIPLES   OF   INDUSTRIAL   ORGANIZATION 

protective  societies  of  any  kind.  The  first  effect  of  the  new 
methods,  therefore,  was  a  heartless  enforcement  of  the  first  two 
principles  enumerated  above,  the  worker  being  suddenly  torn 
from  the  tools  of  production  and  degradation  of  labor  of  the 
worst  kind  resulting.  No  slavery  that  ever  existed  could  have 
been  worse  than  that  into  which  the  textile  workers  of  England 
were  quickly  thrown,  and  it  is  difficult,  even  allowing  for  the 
hard  spirit  of  the  times,  to  account  for  the  atrocities  inflicted 
upon  them  by  those  into  whose  hands  the  control  of  industry 
fell.  An  account  of  these  inflictions  is  out  of  place  in  this 
treatise  but  the  history  of  the  change  should  be  carefully  read 
and  pondered  by  every  man  before  expressing  too  positive  an 
opinion  regarding  labor  matters.  Some  little  extenuation  is 
offered1  for  the  reason  why  the  government  and  the  better 
classes  allowed  this  free  "  exploitation  of  labor,"  in  the  situation 
in  which  England  was  placed  at  that  time.  First,  she  was  con- 
tinually engaged  in  foreign  wars  which  not  only  occupied  the 
attention  of  the  ruling  class  but  made  necessary  large  sums  of 
money  which  were  more  readily  available  under  the  new  methods. 
Second,  but  no  less  important,  were  the  peculiar  views  on  political 
economy  then  in  vogue. 

Darwin's  law  of  the  "  Survival  of  the  Fittest  "  and  the  Mal- 
thusian  doctrine  of  over-population  seems  to  have  made  a  deep 
impression  on  the  existing  national  ideals.  It  was  the  day 
of  "  laissez-faire  "  and  people  apparently  believed  that  these 
things  were  necessarily  so,  or  if  curable  they  would  cure  them- 
selves if  let  alone. 

The  British  government  was  quick  to  see  the  great  commercial 
advantage  of  the  new  machines  and  stringent  laws  were  passed 
prohibiting  the  exportation  of  machines  or  drawings  to  the 
British  colonies  or  foreign  countries.  Several  attempts  were 
made  in  America,  however,  to  establish  the  new  methods,  but 
with  indifferent  success  till  Samuel  Slater,  a  young  Englishman, 
who  had  worked  for  Strutt,  a  former  partner  of  Arkwright, 
built  in  1790  some  Arkwright  spinning  machines  for  the  firm  of 

1  See  The  Factory  System  and  Factory  Acts,  by  R.  W.  Cooke  Taylor.  See 
also  Modern  Factory  System,  by  R.  W.  Cooke  Taylor,  Chapters  6  and  7, 


THE  EFFECTS  OF   THE   GREAT  INVENTIONS     19 

Almy  and  Brown  of  Pawtucket,  Rhode  Island.  These  machines 
operated  72  spindles  and  were  housed  in  the  building  shown  in  the 
frontispiece.  While  other  spinning  machines  were  built  at  about 
the  same  time,  the  success  of  the  Slater  miff  was  so  pronounced 
that  it  has  usually  been  taken  as  marking  the  introduction  of  the 
new  factory  system  into  this  country,  and  Slater  has  been  called 
"  the  father  of  American  manufactures."  The  first  mill1  in 
the  world  wherein  textiles  were  produced  from  the  raw  material 
under  one  roof  was  built  in  Waltham  in  1814. 

The  evil  effects  of  the  new  system  were  never  as  bad  in  America 
as  in  England,  for  obvious  reasons.  The  freedom  of  a  new 
country  and  the  temper  of  the  people  were  both  opposed  to  such 
a  state  of  affairs;  and  before  the  arrival  of  large  numbers  of 
helpless  aliens,  labor  legislation  had  come  to  the  rescue  and  the 
beneficial  effects  of  the  new  methods  enumerated  above  began  to 
be  felt.  Nevertheless  as  the  older  states  become  more  and  more 
thickly  populated  the  evil  effects  become  more  pressing  and  the 
highest  of  statesmanship  will  be  needed  to  show  a  way  out  of 
these  difficulties  if  the  system  is  to  remain  and  fair  and  equitable 
distribution  of  its  advantages  is  to  be  instituted.  • 

The  above  influences  and  effects  are,  of  course,  not  so  marked 
as  formerly,  partly  because  the  industrial  field  is  much  larger 
and  hence  not  so  easily  disturbed;  but  they  still  are,  and  must 
always  remain,  characteristic  features  of  transfer  of  skill  and 
transfer  of  thought,  and  must  alway  be  reckoned  with  in  judging 
the  effects  of  labor-saving  machines  or  processes. 

The  establishment  and  growth  of  the  new  factory  system 
were  greatly  hastened  by  the  changes  wrought  in  methods  of 
transportation  brought  about  by  the  introduction  of  steam 
power.  Obviously  the  new  power-driven  spinning  and  weaving 
machines  had  to  be  grouped  close  to  the  source  of  power.  In  the 
beginning  water  power  was  the  only  source  available,  but  as 
steam  power  came  into  use  the  location  of  factories  was  not  so 
restricted.  With  improved  means  of  transportation  the  con- 
gregation of  men  and  machines  was  not  only  rendered  econom- 

1  See  The  Industrial  Evolution  of  the  United  States,  by  Carroll  D.  Wright, 
p.  131. 


20     PRINCIPLES   OF   INDUSTRIAL   ORGANIZATION 

ically  possible  but  to  the  increased  efficiency  of  productive 
methods  was  added  much  more  effective  means  of  distributing 
the  product.  Local  competition  of  handicraftsmen,  at  a  dis- 
tance from  the  factory  that  would  have  protected  them  under  the 
old  methods  of  transportation,  was  thus  obliterated.  Improve- 
ments in  methods  of  transportation  have  kept  pace  with  im- 
provement in  productive  processes,  since  the  new  productive 
methods  themselves  were  soon  applied  to  the  making  of  machin- 
ery of  transportation. 

To  these  influences  have  been  added  those  of  the  telegraph 
and  telephone  and  other  improved  methods  of  communication. 
These  are  commercial  possibilities,  and  of  almost  universal  use 
and  convenience,  solely  because  of  modern  productive  methods. 
Improvements  in  facilities  for  transportation  or  communicating 
intelligence,  therefore,  aid  productive  processes  and  these  in 
turn  make  transportation  and  communication  more  efficient, 
the  entire  system  of  production  and  distribution  constituting 
a  most  remarkable  development  unlike  anything  that  has  ever 
gone  before. 


CHAPTER  IV. 

CORRECTIVE  INFLUENCES. 

14.  General.     As  might  be  expected  the  direful  conditions 
resulting  immediately  from  the  Industrial  Revolution  brought 
into  life  various  reactive  movements  looking  to  their  reform  and 
toward  fairer  methods  of  distributing  the  increased  wealth  that 
was  created.     Some  of  these  movements,  such  as  the  Trades 
Unions,  are  revivals  of  organizations  that  had  formerly  existed 
and   had    disappeared    because    of   lack  of  economic  necessity 
for   existence.     Others,    such    as    Socialism,    are   more    strictly 
political  in  their  character  and  have  not,  as  yet,  affected  industrial 
organization  directly,  though  exercising  great  modifying  effect 
indirectly   through   other   channels.     These   last   influences  lie 
outside  of  the  scope  of  this  discussion. 

Of  those  that  do  touch  industrial  organization  intimately 
and  directly  and  that  constantly  tend  to  modify  factory  methods 
and  conditions  the  following  are  perhaps  the  most  important. 

(1)  Factory  Welfare  Work. 

(2)  Factory  Legislation. 

(3)  Labor  Unionism. 

(4)  The  Arts  and  Crafts  Movement. 

(5)  Industrial  Education. 

Only  the  briefest  account  of  the  salient  features  of  these 
movements  can  be  given  here.  Reference  is  made  to  them 
solely  to  call  the  attention  of  the  student  to  the  fact  that  they 
are  integral  factors  in  our  industrial  system.  They  are  very 
closely  related  to  factory  management,  and  their  causes  and 
probable  effects  should  be  carefully  studied.  Like  all  other 
phenomena  there  are  definite  causes  for  their  existence  and  they 
will  grow  or  abate  as  these  causes  persist  or  are  removed. 

15.  Factory  Welfare  Work.     Under  this  title  is  included  all 
efforts  of  employers  and  private  individuals,  in  general,  that  are 

21 


22     PRINCIPLES   OF  INDUSTRIAL   ORGANIZATION 

directed  toward  the  betterment  of  their  employees,  physically, 
mentally  and  morally.  The  movement  is  virtually  a  recognition 
that  the  employing  or  capitalistic  class,  as  a  whole,  owes  a 
duty  to  the  employed  class  over  and  above  that  prescribed  by  law; 
and  that  the  employer's  whole  duty  is  not  denned  by  the  agree- 
ment regarding  wages.  While  essentially  private  and  individual 
in  its  character  the  movement  has,  no  doubt,  been  a  powerful 
furtherer  of  industrial  legislation  which,  after  all,  is  simply  an 
expression  of  the  will  of  the  community  and  the  two  are  closely 
connected. 

Welfare  work  owes  its  origin  largely  to  the  work  of  Robert 
Owen  who  in  1800  at  the  age  of  28  became  managing  owner  of 
the  New  Lanark  Mills  about  twenty  miles  from  Glasgow.  The 
village  contained  about  1300  people  in  families  and  between  400 
and  500  pauper  children  between  five  and  ten  years  of  age. 
These  children  were.  "  parish  apprentices,"  that  is  children 
from  the  poor  houses  placed  in  the  mill  village  under  agreement 
with  the  pauper  overseers.  Practically  the  only  law  governing 
these  people  was  the  will  of  the  manager. 

Owen  himself  has  recorded  the  conditions  that  he  found 
at  New  Lanark.  He  says1  "  The  people  lived  almost  without 
control  in  habits  of  vice,  poverty,  idleness,  debt  and  destitution." 
The  state  of  the  pauper  children,  many  of  them  mere  babies, 
was  particularly  distressing.  When  it  is  considered  that  this 
was  conceded  to  be  the  best  managed  mill  village  in  the  kingdom 
one  wonders  what  the  others  were  like,  and,  indeed,  it  is  difficult 
to  believe  the  many  well-authenticated  accounts  of  the  dire  straits 
into  which  the  manufacturing  population  had  fallen  by  reason  of 
the  unrestricted  application  of  the  new  methods. 

Owen2  had  long  pondered  a  plan  for  improving  such  con- 
ditions and  now  had  an  opportunity  for  putting  his  theories  in 
effect.  Against  great  difficulty,  including  opposition  from  the 
employees  themselves,  he  gradually  built  up  a  model  village  the 
equal  of  which  did  not  exist  and  has  seldom  if  ever  been  seen 

1  See  Robert  Owen  and  his  Social  Philosophy,  p.  27. 

2  The  story  of  this  model  village  and  the  point  of  view  of  this  great  reformer 
will  repay  reading.     See  Life  of  Robt.  Owen,  by  Lloyd  Jones,  and  also  Robt. 
Owen  and  his  Philosophy,  by  W.  L.  Sargent. 


CORRECTIVE  INFLUENCES  23 

elsewhere.  His  reforms  included  improved  sanitation  in  homes 
and  factory,  recreative  facilities,  library  and  schools,  methods  of 
purchasing  supplies  for  the  workmen  at  low  rates  in  such  a  way 
that  they  would  not  be  cheated,  elimination  of  drunkenness  and 
the  reduction  of  the  working  day  to  ten  hours,  thirteen  and  four- 
teen or  even  sixteen  hours  being  the  length  of  the  working  day 
elsewhere.  He,  in  fact,  anticipated  practically  every  item  of 
welfare  work  that  has  been  attempted  since. 

Owen  carried  on  this  work  through  good  times  and  bad  times, 
at  one  time  paying  full  wages  for  four  months,  during  which  the 
mills  were  idle,  at  a  cost  of  $35,000.  But  in  spite  of  what,  to  his 
partners  and  many  others,  seemed  an  extravagant  and  useless 
outlay  of  money  the  business  prospered  and  paid  handsomely, 
the  village  becoming  a  model  of  its  kind. 

Differences  with  his  partners  compelled  his  retirement  from 
the  partnership  and  the  village  relapsed  into  its  old  state.  Owen 
took  up  other  activities  looking  toward  legal  protection  of 
factory  employees  and  to  promulgating  his  theories  of  indus- 
trial organization.  These  theories,  frankly  socialistic,  have 
not  and  probably  will  not  be  realized  but,  nevertheless,  the  world 
is  deeply  indebted  to  this  fearless  reformer,  philosopher,  philan- 
thropist and  manufacturer. 

The  ideas  that  he  introduced  at  New  Lanark  were  not  fol- 
lowed to  any  extent  until  a  few  years  ago  when  they  were  revived, 
particularly  in  America.  The  work  has,  in  general,  been  con- 
ducted closely  along  the  lines  of  Owen's  experiment  and  in  some 
instances  great  sums  of  money  have  been  expended  by  single 
individuals  or  companies  in  this  work. 

Curious  as  it  may  seem  at  first  sight,  some  of  the  most  pre- 
tentious efforts  along  this  line  have  resulted  in  disastrous  fail- 
ure. It  is  pertinent,  therefore,  to  examine  the  basis  on  which 
this  work  may  be  successfully  conducted.  It  must  be  borne  in 
mind  that  the  workman  of  to-day  is  vastly  different  from  those 
of  Owen's  time,  and  that  the  good  will  of  his  employees,  backed 
by  public  opinion  and  similar  influences,  make  it  increasingly 
necessary  that  the  employer  be  able  to  justify  expenditures  of  this 
character.  Sanitation,  ventilation  and  safe  and  comfortable 


24     PRINCIPLES   OF   INDUSTRIAL   ORGANIZATION 

surroundings  are  easily  justified  and  pay  good  dividends  on  the 
money  expended  to  obtain  them.  The  danger  usually  lies  in 
overdoing,  as  where  a  i'actory  is  equipped  with  elaborate  lavatories 
and  swimming  tanks  when  the  employees  cannot  afford  a  tin 
bath  tub  at  home.  It  is  clearly  the  privilege  and  duty  of  the 
employer  to  do  what  he  can  to  elevate  the  moral  tone  of  his 
establishment  but  efforts  along  this  line  must  be  very  general  and 
must  not  disturb  educational  or  religious  ideas  that  are  strictly 
individual  or  communal.  Even  efforts  looking  toward  financial 
betterment  must  be  very  clear-cut  and  definite  to  be  successful, 
though  perhaps  this  kind  of  welfare  work  is  most  needed,  espe- 
cially if  accompanied  by  financial  education. 

More  important  still  is  the  spirit  that  animates  the  employer 
in  starting  welfare  work.  If  the  object  be  advertising  or  dis- 
traction of  the  employee  from  other  phases  of  the  factory  life 
nothing  but  failure  can  follow,  as  experience  has  shown.  Even 
when  the  employer's  intention  is  of  the  best,  nothing  which 
savors  of  patronage1  may  be  expected  to  succeed.  Each  factory 
is  a  problem  by  itself  and  none  is  so  small  as  to  prohibit  something 
of  this  kind  being  successfully  undertaken  if  undertaken  in  the 
right  spirit,  and  with  due  regard  to  modern  conditions  of  the 
industrial  field  and  the  intelligence  of  the  workman. 

REFERENCES  : 

Social  Engineering,  by  W.  H.  Tolman. 

Experiments  in  Industrial  Organization,  by  Edward  Cadbury. 

16.  Industrial  Legislation.  Industrial  legislation,  contrary 
to  popular  opinion,  is  far  from  being  a  new  issue.  History2  in 
all  ages  abounds  with  instances  of  the  legal  regulations  of  in- 
dustry and  in  many  countries  the  same  effect  has  been  obtained 
by  custom  or  caste.  Nor  has  industrial  legislation  always  been 
enacted  in  favor  of  the  workman,  but  sometimes  it  has  been 
aimed  against  him  when  economic  causes  gave  him  the  upper 
hand,  as  instanced  in  the  Statute  of  Laborers3  of  the  year  1349. 

1  In  a  recent  strike  against  a  company  that  has  done  a  great  amount  of 
welfare  work  the  slogan  of  the  strikers  was  "more  pay  and  less  charity." 

2  See  The  Law  of  Hammurabi. 

3  See  The  Factory  System  and  the  Factory  Acts,  by  W.  Cooke  Taylor,  p.  51. 


CORRECTIVE  INFLUENCES  25 

It  is  in  fact  a  comparatively  recent  conception  that  the  commu- 
nity should  have  little  or  no  jurisdiction  over  the  method  of 
conducting  industry.  It  so  happened  that  at  the  time  of  the 
Industrial  Revolution  the  workman  was  totally  unprotected, 
legally,  and  the  mutual  protection  of  the  old  guilds  had  van- 
ished. As  has  also  been  noted  the  attitude  of  the  ruling  class 
was  one  of  laissez-faire  and  tended  to  exalt  unduly  the  rights  of 
the  individual  and  to  minimize  his  responsibility.  The  first 
efforts  of  reformers  who  sought  legal  help  in  rectifying  the  evils 
of  the  new  factory  towns  met,  therefore,  with  little  attention, 
and  less  sympathy ;  and  it  was  not  until  diseases1  incident  to  the 
condition  in  these  factory  towns  broke  out  that  they  obtained 
a  hearing. 

The  fight  for  legal  regulation  of  factories  was  led  by  such  men 
as  Robert  Owen,  Richard  Oastler2  and  Sir  Robert  Peel,  and  the 
first  modern  Factory  Act  in  England  was  passed  in  1802.  Its  ef- 
fects and  that  of  the  four  succeeding  acts  were  almost  nil  although 
based  on  the  findings  of.  commission  after  commission  appointed 
to  investigate  these  evils.  Our  principal  source  of  information 
regarding  the  direful  state  of  the  manufacturing  population  is 
the  evidence  laid  before  these  commissions.  A  brief  statement, 
even,  of  the  slow  and  discouraging  growth  of  this  movement 
would  be  out  of  place  here,  though  it  will  repay  reading.  It  was 
not  until  1891  or  one  hundred  years  after  the  great  inventions  that 
a  factory  law  was  enacted  in  England  that  in  any  adequate  way 
regulated  some  of  the  evils  that  they  had  unloosed. 

While  conditions  were  never  quite  so  bad  in  America,  indus- 
trial legislation  has  grown  steadily  as  the  various  states  have 
become  more  and  more  thickly  populated  and  the  problems  of 
existence  have  become  more  and  more  complex.  Thus  the  in- 
dustrial legislation  of  the  older  states,  such  as  Massachusetts  or 
Connecticut,  is  voluminous  and  governs  details  of  industry  to  a 
degree  quite  startling  to  one  who  has  not  inquired  into  it.  This 
form  of  legislation  is  growing  very  rapidly,  in  keeping  with  the 
growing  public  sentiment  that  the  state  has  police  powers  over 

1  Ibid.,  p.  53. 

2  See  Modern  Factory  System,  by  W.  Cooke  Taylor,  pp.  209-211. 


26     PRINCIPLES   OF   INDUSTRIAL   ORGANIZATION 

all  industry  and  that  the  community  has  a  right  to  regulate  the 
manner  in  which  industry  may  be  conducted  in  its  midst,  and 
that  there  is  just  as  much  need  of  regulating  productive  indus- 
try as  of  regulating  and  licensing  the  professional  callings,  such 
as  medicine  and  law. 

It  would  be  useless  to  attempt,  here,  even  a  synopsis  of  the 
industrial  laws  of  the  various  states,  as  they  vary  in  character 
with  the  character  of  the  industries  of  the  state  and  the  degree 
to  which  these  industries  have  been  developed.  In^their  most 
highly  developed  form,  as  in  Massachusetts,  they  exercise  con- 
trol over  factory  construction  in  so  far  as  ventilation,  sanitation, 
fire  protection,  etc.,  are  concerned.  They  regulate  the  installa- 
tion of  machinery,  such  as  elevators,  and  prescribe  that  care  must 
be  exercised  to  make  all  machinery  safe  for  the  workman.  They 
also  carefully  regulate  the  hours  of  labor,  child  labor,  employ- 
ment of  women,  regularity  of  payment,  etc.,  in  great  detail.  The 
aim,  in  general,  is  to  protect  the  public  from  the  dangers  of 
the  business  as  a  whole,  and  to  protect  the  workman  against 
the  dangers  of  his  calling.  In  the  past  they  have,  usually,  been 
negative  and  prohibitory  and  were  seldom  constructive  in  char- 
acter. This  follows  from  the  nature  of  their  inception  which  is 
almost  always  the  prohibiting  of  abuses.  Of  late,  however,  con- 
structional legislation  has  appeared  in  considerable  volume. 

Evoked  originally  to  correct  certain  abuses  in  places  where 
congregated  labor  was  a  factor,  they  have  spread  with  great 
rapidity  to  include  nearly  all  forms1  of  industry.  How  far  they 
will  extend  is  difficult  to  predict,  but  recent  legislation,  such  as 
some  of  the  Employers'  Liability  Acts  passed  by  some  states,  is 
very  significant,  and  no  factory  owner,  manager  or  employee 
can  afford  not  to  study  carefully  this  factor  in  production  when 
the  new  methods  of  intensified  production  and  so-called  scien- 
tific management  are  under  such  close  scrutiny. 

i  Industrial  legislation,  as  has  been  noted,  is  closely  connected 
with  welfare  work  and  may,  in  fact,  be  the  result  of  the  efforts 
of  employers.  The  idea  that  all  industrial  legislation  is  the 

1  A  few  callings  such  as  domestic  service  seein  to  be  still  without  legislative 
regulation. 


CORRECTIVE   INFLUENCES  27 

result  of  labor  agitation  is  erroneous.  In  many  instances  the 
rights  of  employers  and  owners  are  specially  guarded  legally 
and  in  some  countries  labor  disputes  are  settled  by  state  boards 
of  arbitration. 

17.  Labor  Unionism.      The  tendency  to  organize   is   deep- 
rooted   in    human   nature.     Men    organize    for   all   manner  of 
purposes,  sometimes  for  very  foolish  purposes.    If  to  this  natural 
tendency  is  added  the  fear  of  a  common  danger  this  tendency  is 
irresistible.     A  common  danger  will  weld  together  men  of  all 
sorts  of  characteristics;  and  if  the  influence  be  strong  enough  the 
organization  so  formed  will  not  reflect  the  characteristics  of  those 
forming  it,  but  will  reflect  a  class  consciousness  that  buries  all  in- 
dividual differences  in  the  effort  to  attain  the  end  sought  by 
organizing.     Labor  unions,  therefore,  are  very  old  human  insti- 
tutions.    They  have  appeared  in  several  forms  and  have  dis- 
appeared when  economic  conditions  rendered  them  unnecessary. 

It  was  very  natural,  therefore,  that  labor  unions  should  spring 
into  existence  as  the  result  of  the  industrial  revolution.  They 
are  a  very  natural  result  of  changed  industrial  conditions  and 
the  time  has  long  since  passed  when  such  movements  can  be 
suppressed  by  legislative  action.  While  the  history  of  modern 
trade  unionism  is  filled  with  instances  where  they  have  been 
oppressive  and  even  lawless  they  have,  no  doubt,  rendered  a 
great  service  in  checking  some  of  the  natural  tendencies  of  the 
new  industrial  system  and  in  bettering  the  lot  of  the  worker. 
The  movement  should  be  judged  only  after  reading  carefully 
the  entire  history  of  our  manufacturing  system.  Trade  unionism 
has  suffered  in  times  past  for  lack  of  intelligent  and  honest  lead- 
ership. If  these  defects  could  be  remedied  their  usefulness 
would  be  greatly  increased  and  the  prejudice  now  so  com- 
monly, and  often  justly,  held  against  them  would  be  greatly 
abated. 

18.  The  Arts  and  Crafts  Movement.     It  is  obvious  that  the 
separation  of  the  worker  from  his  tools  of  production  and  the 
breaking  up  of  the  old  trades  by  the  extension  of  the  principle 
of  division  of  labor  tended  greatly  to  destroy  the  interest,  pride 
and  pleasure  which  the  handicraftsman  took  in  his  work.     Fac- 


28     PRINCIPLES   OF   INDUSTRIAL   ORGANIZATION 

tory-made  product  is  not,  in  general,  the  work  of  any  one  man 
but  of  many.  The  only  class  of  worker  who  still  retains  some- 
thing of  the  old  handicraft  spirit  is  the  designer,  who  may  yet 
look  on  the  product  as  the  creation  of  his  own  brain,  though  not 
of  his  hands.  Furthermore,  the  earlier  factory  products  of  all 
kinds  were  necessarily  crude  and  inartistic,  because  of  the  prim- 
itive nature  of  the  first  machines  and  also  because  of  the  lack 
of  artistic  appreciation  on  the  part  of  the  new  class  of  men  that 
came  into  control  of  industry.  This  lack  of  artistic  sense  was 
and  still  is  reflected  in  the  architecture  and  general  surround- 
ings of  many  factory  towns.  There  is  no  doubt  but  that  the 
early  factory  methods  and  surroundings  dealt  a  hard  blow  at 
the  artistic  side  of  manufacture  and  affected  many  other  phases 
of  our  life  in  a  similar  way;  and  before  effective  reformative 
influences  came  into  being  the  spontaneous  art  of  the  old  handi- 
craftsman was  dead. 

The  writings  of  William  Morris,1  the  great  English  poet  and 
artist-manufacturer,  greatly  strengthened  a  growing  sentiment 
against  the  strict  utilitarianism  of  our  modern  methods,  and  at 
present  this  movement,  though  not  organized,  is  effecting  a 
decided  change  in  our  manufactured  products  and  factory  sur- 
roundings, though  in  a  somewhat  different  manner  perhaps 
than  some  of  the  earlier  promoters  of  the  idea  had  intended. 

To  the  earlier  advocates  of  more  artistic  products  and  sur- 
roundings it  seemed  that  the  only  effective  remedy  for  the  ultra- 
utilitarianism  of  the  early  days  was  a  return  to  handicraft  methods 
and  surroundings,  and  many  have  advocated  this  remedy. 
Granting  that  such  a  return  could  be  made  it  would  not  be 
desirable  even  for  the  purpose  advocated.  It  must  be  remem- 
bered that  the  artistic  product  of  the  old  handworker  was  not,  in 
general,  for  his  own  use.  He  was  fortunate  indeed  to  get  enough 
to  eat  and  to  drink  and  a  hovel  to  shelter  himself  and  family, 
and  artistic  furniture  and  surroundings  were  for  the  favored  few. 
The  great  problem  of  the  masses  has  not  been  the  obtaining  of 
artistic  surroundings  but  the  obtaining  of  even  enough  of  the 
necessities  of  life  to  be  simply  comfortable.  It  is  not  probable 

1  See  Hopes  and  Fears  for  Art  and  also  The  Aims  of  Art,  by  Wm.  Morris. 


CORRECTIVE  INFLUENCES  29 

that  any  means  of  increasing  our  productive  capacity1  will  be 
discarded,  until  it  is  certain  that  the  evils  of  the  modern  system 
cannot  be  limited  and  controlled.  Regulation  of  modern  pro- 
ductive and  distributive  processes  and  not  destruction  of  them  is 
what  is  needed. 

For  it  is  to  be  especially  noted  that  productive  industry  is 
the  foundation  of  man's  physical  and  mental  well-being;  and  art 
is  the  blossom  of  industry.  The  problem  now  is  to  build  up  a 
new  industrial  art  suited  to  the  new  conditions.  It  is  true,  of 
course,  that  the  highest  forms  of  artistic  production  must  neces- 
sarily always  be  handwork;  but  there  is  no  reason  why  the 
product  even  of  modern  machine  processes  may  not  be  artistic  to 
a  high  degree.  The  limitations  of  the  early  machines  no  longer 
exist  and  production  of  any  design  can  be  made  with  ease  and 
cheapness. 

The  great  need,  at  present,  is  a  general  awakening  of  artistic 
appreciation  in  the  people  at  large.  The  manufacturer  naturally 
caters  to  the  demands  of  the  public  and  the  artistic  standard 
of  manufactured  goods  is  an  indication  of  the  taste  of  the  buy-, 
ing  public.  The  general  appearance  of  most  of  our  household 
goods  is  notoriously  inartistic,  yet,  in  general,  all  articles  become 
more  pleasing  to  the  eye  as  they  become  better  suited  to  the 
purpose  for  which  they  are  intended.  When  it  is  more  widely 
understood  that  beauty  of  purpose  and  not  decoration  is  the  real 
basis  of  good  appearance  a  great  change  will  come  in  the  appear- 
ance of  manufactured  goods. 

Great  progress  has  already  been  made,  as  for  instance,  in 
the  appearance  of  shoes,  buttons,  wall  papers  and  patterned 
cloths  and  as  our  educational  methods2  take  greater  cognizance 
of  this  phase  of  industry  still  greater  progress  will  ensue.  If  the 
benefits  of  our  industrial  methods  can  be  equalized  there  is  no 
doubt  but  that  they  will  be  the  basis  of  an  art  equal  to  and  vastly 
more  widespread  than  any  that  has  gone  before.  Even  at  the 

1  The  failure  of  the  natural  resources  such  as  coal  and  iron  may  in  time 
force  man  to  return  to  a  much  more  primitive  state  than  he  now  enjoys  unless 
he  can  find  substitutes  for  these  basic  features  of  our  civilization. 

2  See  Aesthetic  Education  by  Charles  DeGarmo  for  the  modern  educational 
viewpoint  of  artistic  education. 


30     PRINCIPLES   OF   INDUSTRIAL   ORGANIZATION 

present  moment  it  is  possible,  because  of  modern  methods,  for  the 
humblest  to  possess  and  enjoy  artistic  things  in  a  degree  never 
before  equalled  by  any  other  similar  class  in  the  history  of 
mankind. 

19.  Industrial  Education.  Previous  to  the  introduction  of  our 
modern  industrial  methods,  educational  processes  were  limited  to 
those  needed  by  the  clergy  and  the  ruling  class.  These  processes 
were  very  limited  in  number  and  were  almost  entirely  humanistic. 
The  rapid  growth  of  pure  and  applied  science  stimulated  by  the 
new  industrial  methods  quickly  created  a  demand  for  men  trained 
in  a  somewhat  different  manner  as,  clearly,  humanistic  studies 
did  not  fully  prepare  a  man  for  scientific  work.  Hence  arose  the 
modern  professional  colleges  of  Law,  Medicine,  Engineering,  etc. 

This  modification  in  our  educational  methods  has  not  come 
about,  however,  without  much  debate  and  difference  of  opinion, 
the  advocates  of  the  older  forms  of  education  claiming  that 
modern  scientific  education  was  no  education  at  all,  and  the 
advocates  of  the  new  methods  avering  that  they  were  as  well 
adapted  to  give  breadth  of  view  as  the  older  humanistic  studies. 
The  extremist  of  both  sides  were,  as  usual,  wrong.  All  modern 
professional  education  tends  more  and  more  to  require  a  liberal 
training  in  the  humanities  as  a  background  while  the  purely 
liberal  courses  tend  more  and  more  to  have  a  vocational 
direction. 

The  problem  of  vocational  training  has  long  been  fairly  well 
solved  for  that  portion  of  the  field  which  is  fed  by  the  colleges. 
As  industry  has  grown  and  scientific  applications  have  become 
more  frequent  and  necessary  the  demand  for  more  specialized 
training  has  extended  farther  and  farther  down  our  educa- 
tional system  till  at  present  the  schools  of  high  school  grade 
are  rapidly  adjusting  themselves  and  there  now  exist,  the  old 
classical  high  school,  the  commercial  high  school,  the  manual 
training  high  school,  the  agricultural  high  school,  etc.,  etc. 

The  demand  for  industrial  education  for  those  working  at 
trades  and  in  the  lower  ranks  of  industry  rests  upon  a  some- 
what different  basis  from  that  which  modified  the  upper  schools. 
The  new  methods  of  production  involving  transfer  of  skill  and  a 


CORRECTIVE  INFLUENCES  31 


tremendous  extension  of  the  principle  of  division  of  labor  very 
naturally  tended  to  break  up  the  old  handicraft  trades  into 
fragmentary  parts.1  This  dissolution  carried  with  it  the  old 
apprenticeship  systems  practically  all  of  which  have  been  swept 
away  and  the  new  methods  are  naturally  antagonistic  to  facilities 
for  training  workers. 

The  manufacturer,  nevertheless,  must  have  skilled  men,  and  to 
obtain  them  he  must  either  establish  new  methods  for  training 
them  in  connection  with  his  business  or  depend  on  some  outside 
source.  In  his  dilemma  he  has  turned  to  the  public  school  system, 
and  the  result  has  been  a  strong  demand  for  the  modification  of 
the  elementary  schools  along  vocational  lines. 

On  the  other  hand  it  is  recognized,  as  never  before,  that 
physical  and  mental  well-being  and  good  citizenship  depend 
on  ability  to  make  a  living;  and  that  consequently  every  man 
should  *be  as  well  equipped  industrially  as  possible.  And  since 
the  new  industrial  conditions  have  made  the  presence  of  women 
in  industry  an  economic  necessity  it  follows  that  their  preparation 
for  life  should  also  be  carefully  considered.  But,  as  already  noted, 
the  new  industrial  conditions  do  not,  naturally,  provide  facilities 
for  training  workers  and  until  quite  recently  educational  systems 
took  little  or  no  notice  of  vocational  training  in  a  specific  manner. 
Yet  experience  has  shown  that,  with  industry  constituted  as  it  is 
at  present,  the  upward  progress  of  industrial  workers  is  measured 
by  the  educational  preparation  they  receive  before  entering  the 
field.  The  boy  or  girl  who  enters  industry  with  a  meager  edu- 
cation is  ordinarily  predestined  to  remain  in  the  low  paid  ranks  of 
labor  and  this  tendency  increases  as  labor  becomes  more  special- 
ized and  more  dependent  on  scientific  methods.  When  it  is 
considered  that  only  twenty-five  per  cent  of  the  boys  and  girls 
of  this  country  obtain  a  grammar-grade  education  it  is  not 
difficult  to  understand  why  there  is  always  a  surplus  of  low  paid 
labor  and,  usually,  a  scarcity  of  skilled  workers. 

1  A  good  example  is  the  shoemaking  industry.  Shoes  are  no  longer  made 
by  shoemakers  but  by  operators  who  run  highly  developed  machines  each  of 
which  does  a  very  limited  part  of  the  work.  Shoemaking  as  a  trade  has 
practically  disappeared. 


32     PRINCIPLES   OF   INDUSTRIAL   ORGANIZATION 

This  broader  aspect  of  industrial  education,  therefore,  con- 
cerns everyone  since  it  affects  the  entire  life  of  the  nation. 
It  has  already,  in  some  states,  exerted  a  powerful  influence 
tending  to  modify  the  public  school  system  and  it  portends  in  the 
near  future  not  only  a  change  in  educational  methods  but  closer 
state  supervision  of  all  boys  and  girls  in  the  lower  grades.  It  is  a 
question  of  utmost  importance. 

No  general  solution  of  this  problem  has  as  yet  been  arrived 
at  and  the  entire  matter  is  in  a  very  chaotic  state.  The  fol- 
lowing are  the  most  important  methods  which  are,  at  present, 
being  tried  out  in  various  parts  of  this  country: 

(a)  New   forms   of   apprenticeship   which   include   academic 
training  and  which  usually  cover  a  narrower  range  of  practical 
work  than  the  old  systems,  and  do  not  require  such  a  long  period 
of  apprenticeship. 

(b)  Privately  endowed  or  supported  trade  schools  which  aim 
to  send  out  men  quite  completely  prepared  to  enter  the  industries. 

(c)  Vocational  and  trade  schools  supported  by  the  state  or 
city  and  forming  an  integral  part  of  the  public  school  system. 

(d)  "  Part-time "    schools   in   which    the   pupil   receives   his 
training  in  either  a  private  or  public  school  and  obtains  the  prac- 
tical part  in  an  actual  factory,  mutual  agreements  being  made 
between  the  schools  and  the  shop  so  that  the  student  alternates 
between  the  two  under  the  direction  of  instructors  who  see  that 
coordination  of  theory  and  practice  is  effected. 

The  kind  of  school  best  adapted  to  the  purpose  depends  on 
the  local  conditions.  All  are  good  and  useful  in  their  proper 
place  and  no  one  of  them  can  be  said  to  be  the  best  for  all  places. 
Fundamentally,  however,  there  is  only  one  kind  of  school  whose 
doors  are  open  to  all  comers  and  which  is  not,  or  at  least  should 
not  be,  dominated  by  any  private  interest,  and  that  is  the  pub- 
lic school.  In  the  writer's  opinion1  the  only  general  solution  of 
the  problem  that  can  ever  be  reached  must,  therefore,  be  based 
upon  that  system. 

But  aside  from  the  general  problem  of  industrial  education 
as  a  means  of  supplying  skilled  workers  there  is  a  growing  sen- 
1  See  Industrial  Education,  by  D.  S.  Kimball. 


CORRECTIVE  INFLUENCES  33 

timent  that  it  pays  to  train  men  for  the  specific  needs  of  their 
calling.  The  old  attitude  on  the  part  of  the  employer  laid  the 
burden  of  responsibility  entirely  on  the  worker.  The  work  of 
Mr.  H.  L.  Gantt1  has  called  special  attention  to  the  advantages 
of  teaching  men  the  best  way  to  do  the  work  rather  than  to  de- 
pend entirely  on  their  native  ability.  Such  methods  cannot 
fail  to  raise  the  standard  of  production  and  are  well  worth  con- 
sidering. 

1  See  Work  Wages  and  Profits  by  H.  L.  Gantt. 


CHAPTER  V. 

MODERN  INDUSTRIAL  TENDENCIES. 

20.  Definitions.     The  new  industrial  methods  have  greatly 
accelerated    certain    tendencies    that    had    already    manifested 
themselves  in  the  old  domestic  factories  and  some  of  these  de- 
serve more  than  passing  notice  as  they  are  affecting  not  only 
productive  processes  but  our  social  organization  as  well.     Per- 
haps the  most  important  of  these  influences  are  those  that  tend 
toward  — 

(1)  Aggregation  or  increase  in  size  of  industrial  enterprises. 

(2)  Specialization  or  the  limiting  of  the  field  of  activity,  not 

only  of  enterprises  but  also  of  men. 

(3)  Standardization  or  the  reduction  of  all  lines  of  product  to 

a  limited  number  of  types  and  sizes. 

(4)  Extreme  division  of  labor,  following  aggregation,  special- 

ization, and  standardization  and  requiring  special  con- 
sideration. 

These  tendencies  are  all  closely  interlocked  with  each  other, 
and  with  modern  productive  methods.  It  will  be  clearer,  how- 
ever, to  discuss  them  separately  before  summing  up  their  joint 
action. 

21.  Aggregation  or  Increase  in  Size.    The  tendency  for  all  suc- 
cessful industrial  enterprises  to  constantly  increase  in  size  is  one 
of  the  most  significant  features  of  the  modern  industrial  field. 
The  reasons  for  this  tendency  are  several  fold.     There  are  cer- 
tain advantages  that  inherently  accrue  to  congregated  labor, 
centrally  controlled,  as  against  individual  effort.    The  large  fac- 
tory can  purchase  in  large  quantities  and  hence  more  advan- 
tageously.    As   the   quantity   of   supplies  purchased   increases 
the  large  factory  tends  continually  to  manufacture  its  own  sup- 
plies from  raw  material,  thus  tending  to  increase  its  size  and  to 
control  more  completely  the  manufacture  of  its  product.     If 

34 


MODERN   INDUSTRIAL   TENDENCIES  35 

well  managed,  the  fixed  charges  (i.e.,  for  management,  super- 
intendence, etc.)  will,  in  general,  be  less1  than  those  of  its  smaller 
competitor,  per  unit  of  product.  The  prestige  and  influence  of 
a  large  factory  assist  materially  in  selling  its  product,  largely 
because  of  the  apparently  greater  stability  and  permanency 
which  it  suggests.  A  large  organization  can  afford  to  hire  a 
better  class  of  men  especially  for  the  higher  positions  of  admin- 
istration or  design.  These  advantages  were,  no  doubt,  appre- 
ciated before  the  present  industrial  era  by  the  masters  of  the 
handicraft  factories,  as  records  clearly  show. 

Modern  industrial  methods  have  not  only  magnified  these 
natural  causes  of  industrial  growth  but  have  added  others.  The 
handicraft  system  of  manufacture  was  essentially  individual  in 
its  character,  congregated  labor  or  factories  being  incidental 
and  not  essential.  The  very  fact  that  the  new  machines  were 
power-driven  made  it  imperative  that  they  be  grouped  near  the 
prime  mover,  the  number  of  machines  that  could  be  worked 
depending  only  on  the  power  available.  With  the  unlimited 
power  provided  by  the  steam  engine  the.  size  of  the  factory  and 
its  consequent  profits  were  limited  only  by  the  available  mar- 
ket. The  modern  factory  system  is,  therefore,  essentially  based2 
on  congregated  labor  and  the  natural  tendency  of  the  large  and 
strong  to  grow  larger  and  stronger  at  the  expense  of  the  smaller 
and  weaker  has  not,  until  lately  at  least,  been  held  in  check  so 
far  as  factories  are  concerned,  though  the  same  tendency  has 
been  closely  regulated  in  other  human  relations.  Furthermore, 
as  industry  grew,  undertakings  became  larger  and  more  complex. 
The  first  locomotive  was  a  mere  toy  compared  with  the  three- 
hundred-ton  Mallett  compounds  of  our  day,  and  industrial 
plants  have  grown  in  proportion. 

1  This  is  not  always  true.     For  instance,  a  large  manufacturer  making  a 
wide  range  of  product  may  not  be  able  to  meet  the  prices  of  a  small  manu- 
facturer who  is  competing  only  in  one  or  more  lines  for  which  he  can  furnish 
an  adequate  manufacturing  equipment  at  less  cost  than  his  big  competitor 
and  with  a  lower  fixed  charge. 

2  Some  critics  of  the  modern  factory  system  have  advocated .  the  electrical 
distribution  of  energy  as 'a  means  of  doing  away  with  congregated  labor  and 
returning  to  individual  effort.     A  very  cursory  survey  of  the  industrial  field 
will  convince  anyone  of  the  futility  of  such  speculation. 


36     PRINCIPLES   OF   INDUSTRIAL   ORGANIZATION 

But  there  is  another  and  very  important  reason  for  the  in- 
creased size  of  manufacturing  plants  that  has  its  origin  in  the 
financial  basis  of  modern  methods.  This  is  the  economy  aris- 
ing from  the  use  of  better  tools,  which,  usually,  are  justified  only 
with  larger  output.  Referring  to  Fig.  1,  suppose  that  it  is 
required  to  drill  four  pieces  like  A  and  that  it  requires  $3  worth 
of  skilled  labor  to  do  the  work.  Assume  also  that  the  cost  of  the 
jig  B  is  $10.  Clearly  it  will  not  pay  to  make  a  jig  for  the  four 
pieces.  But  suppose  now  that  500  pieces  are  to  be  made  and 
that  by  using  the  jig  -a  semi-skilled  man,  receiving  $2  per  day, 
can  drill  the  entire  lot  in  five  days,  at  a  total  cost  of  $10.  Then 
the  cost  of  drilling,  per  piece,  including  the  cost  of  the  jig  will  be 

'-  -  =  4  cents;    whereas  when  drilled  by  hand  the  cost 

<i£o  f\r\ 

was  -      -  =  75  cents  per  piece.     If  fourteen  pieces  were  re- 
4 

quired  the  cost  would  be  about  the  same  with  or  without  the 
jig.  That  is,  the  question  of  whether  it  will  pay  to  make  tools 
and  apply  transfer  of  skill  depends  primarily  on  the  quantity  to 
be  made.  The  greater  the  quantity  to  be  made,  the  more  com- 
plete and  costly  may  be  the  tools.  But  the  more  complete  the 
tools  the  cheaper  becomes  the  product,  and  a  decrease  in  the 
cost  of  the  product  stimulates  the  demand  for  it;  and  this  in 
turn  increases  the  number  that  can  be  made.  Thus  we  see  an 
ever-widening  cycle  limited  only  by  the  available  market,  and 
in  certain  lines,  where  the  product  is  greatly  desired  by  all  and 
the  cost  of  the  material  low,  as  in  watches,  the  limit  is  practi- 
cally set  only  by  the  population.  Where  the  quantity  becomes 
great,  as  in  typewriters,  watches,  guns,  shoes,  etc.,  the  advan- 
tages of  the  system  can  be  realized  most  fully,  and  much  of  the 
machinery  employed  is  of  the  full-automatic  type  involving 
also  "  transfer  of  intelligence.  "  Such  manufacturing  is  known 
as  "  mass  production." 

These  reasons  for  industrial  growth  are  entirely  aside  from 
certain  other  natural  tendencies  which  should  be  noted.  Manu- 
facturing industries  tend  as  a  whole  to  congregate  in  locations 
which  are  advantageous  to  the  industry  either  because  of  cheap 


MODERN  INDUSTRIAL   TENDENCIES  37 

material,  cheap  labor,  ample  supply  of  labor,  transportation 
facilities  or  similar  reasons.  The  tendency  to  organize  is,  as 
before  noted,  deep  rooted  in  human  nature;  it  is,  in  fact,  a  basic 
•feature  of  civilization.  It  is  very  natural,  then,  that  industrial 
interests  should  organize  for  mutual  help  and  benefit.  So  on 
one  hand  appear  labor  unions  or  combinations  of  workers,  and 
on  the  other  hand  manufacturer's  associations,  consolidations, 
syndicates,  trusts;  and  all  are  logical  results  of  the  principles 
on  which  modern  industry  rests.  Back  of  both  kinds  of  organi- 
zation there  are  good  economic  reasons  for  their  existence;  but 
the  unreasonableness  and  violence  often  displayed  by  the  one 
and  the  ruthless  profit-wringing  methods  of  the  other  have,  to  a 
large  extent,  obscured  from  public  view  what  good  elements 
they  may  possess.  However,  it  is  not  likely  that  these  organi- 
zations can  be  suddenly  legislated  out  of  existence.  Their 
evil  practices  will  disappear  only  as  public  sentiment  develops 
against  them,  and  regulative  legislation  will  be  effective  in 
proportion  to  the  growth  of  nation-wide  ideals  looking  to  a 
wise  and  fair  use  of  the  power  which  organization  confers  upon 
vast  combinations  of  either  employers  or  employees.  The  last 
two  decades  have  seen  a  wonderful  change  in  public  sentiment 
towards  congregated  industry  and  its  evils,  particularly  on  the 
side  of  the  employing  class,  and  it  is  hoped  that  the  world  will 
soon  outgrow  and  render  impossible  these  defects  as  it  has 
eliminated,  it  is  to  be  hoped  forever,  other  evils  equally  bad. 

SPECIALIZATION. 

22.  General  Features.  The  underlying  principle  of  speciali- 
zation is  division  of  labor;  but  the  term  division  of  labor  has 
becojme  associated  with  the  individual  worker,  whereas  speciali- 
zation is,  in  general,  far  reaching  in  its  effects,  and  influences 
industrial  enterprises  of  all  kinds.  The  tendency  to  confine  the 
activities  of  an  enterprise  to  a  limited  portion  of  the  field  may 
be  seen  by  studying  the  development  of  any  branch  of  manufac- 
turing industry.  Not  many  years  ago  it  was  common  to  find 
single  machine  shops  producing  many  and  varied  lines  of  work. 
Engines,  boilers,  mining  machinery,  marine  work  and  in  fact 


38     PRINCIPLES   OF   INDUSTRIAL   ORGANIZATION 

almost  anything  in  the  line  of  machine  construction  were  designed 
and  built  in  the  same  shop.  As  the  industrial  field  broadened 
and  competition  became  keener,  manufacturers  found  that  they 
could  produce  more  cheaply  by  concentrating  on  fewer  lines  of 
work  and  obtaining  greater  quantity  of  product  in  these  lines, 
since,  as  has  been  shown  in  Article  21,  cost  is  dependent  to  a  large 
extent  on  quantity.  This  tendency  has  been  greatly  hastened  by 
the  difficulty  of  keeping  up  with  the  progress  of  manufacturing  in 
a  number  of  lines,  particularly  where  the  industry  rested  on  a 
scientific  basis.  Many  new  industries  have  sprung  up  that  are 
very  limited  in  scope  either  because  they  are  based  on  patents  or 
chemical  processes,  or  because,  like  many  of  the  continuous  proc- 
ess industries,  such  for  instance  as  cement  manufacturing  and 
similar  undertakings,  they  are  naturally  so  limited.  Again  as  the 
industrial  field  grew,  manufacturers  found  that  they  could  buy 
many  things,  formerly  made  in  their  shops  in  small  quantities, 
much  cheaper  than  they  could  manufacture  them.  Thus, 
formerly,  every  shop  made  its  own  small  tools  and  appliances 
such  as  taps  and  dies,  bolts,  etc.  But  other  men  were  quick  to 
see  that  by  manufacturing  such  supplies  in  quantity  they  could 
sell  them  to  other  manufacturing  plants,  that  used  them  in  small 
quantities,  much  cheaper  than  the  latter  could  make  them.  The 
larger  quantity  was  secured,  of  course,  by  supplying  many  users. 
The  result  has  been  that  the  factory  of  to-day  is  no  longer  self- 
sufficient  to  its  purposes,  but  depends  on  many  sources,  not  only 
for  its  raw  material,  but  often,  also,  for  the  greater  part  of  its  tools 
and  appliances  great  and  small.  It  may,  in  fact,  find  it  advan- 
tageous to  manufacture  certain  sizes  of  a  given  product  and  rely 
on  other  factories  for  other  sizes,  depending  upon  the  quantity  of 
trade  it  can  command.  This  tendency  toward  specialization 
grows  constantly,  the  underlying  economic  reason  being,  as  before 
noted,  the  advantages  accruing  from  division  of  labor  and  transfer 
of  skill. 

There  is  a  somewhat  curious  reversal1  of  this  general  law  that 
sometimes  occurs  and  that  should  be  noted.     It  may  occur  that 
an  enterprise  may  not,  in  the  beginning,  find  it  advantageous 
1  See  also  Chapter  XIII. 


MODERN   INDUSTRIAL   TENDENCIES  39 

to  operate,  say,  a  foundry,  but  because  of  the  limited  amount  of 
castings  used,  can  secure  them  from  specialists  cheaper  than  it 
could  make  them.  As  the  business  grows,  however,  there  may 
come  a  time  when  the  quantity  of  castings  is  sufficient  to  warrant 
the  operation  of  a  foundry,  thus  saving  the  profit  formerly  paid 
to  the  specialist.  Thus  as  enterprises  grow  larger  and  larger  their 
ability  to  manufacture  all  the  accessories  of  their  business  in- 
creases and  they  are  able  to  command  a  wider  range  of  finished 
product.  This  is  well  illustrated  in  the  great  electrical  manu- 
facturing companies  that  now  manufacture  many  of  their  own 
accessories  such  as  porcelain,  oil  cloth,  mica-board,  etc.,  that 
formerly  were  furnished  by  specialists.  There  is  often  a  great 
advantage  in  being  able  to  manufacture  these  accessories  aside 
from  the  financial  saving,  in  that  it  affords  a  better  control  of 
the  sources  of  supply,  which  is  not  a  small  matter  in  these  days, 
when  time  of  delivery  is  often  an  important  factor. 

23.  Specialization  of  Men.  As  the  field  of  an  enterprise 
narrows,  the  character  of  its  plant  necessarily  also  narrows,  the 
limit  being  reached  in  the  form  of  continuous  industries  (Article 
40)  where  practically  no  flexibility  exists  in  the  character  of  the 
process,  each  tool  or  machine  being  specially  designed  for  its 
particular  function,  and  no  other.  The  range  of  the  tools  and  the 
work  of  a  specialized  shop  is,  hence,  narrower  than  those  of  the  old 
general  establishment,  that  now  survives  only  in  the  form  of  the 
repair  shop.  This,  of  itself,  tends  naturally  to  narrow  the  field  of 
action  of  the  man  employed  in  the  industry  and,  in  addition,  the 
same  influences  that  are  narrowing  the  field  of  activity  of  each 
enterprise  are  also  at  work,  internally,  narrowing  the  field  of  the 
worker.  This  is  so  because  greater  output  can  be  obtained  when 
men  are  specialized,  the  skill  and  speed  in  any  operation  in- 
creasing with  the  specialization.  These  two  influences,  special- 
ized machinery  and  the  resultant  division  of  labor,  have  already 
produced  some  very  remarkable  results.  Not  so  many  years  ago 
the  shoemaker  measured  his  customer's  foot  and  made  the  shoe  or 
boot  completely.  To-day  by  means  of  specialized  machinery  and 
labor  the  making  of  a  shoe  is  divided  up  into  a  great  many 
operations,  so  that  the  operator  may  spend  his  entire  life  in 


40     PRINCIPLES   OF   INDUSTRIAL   ORGANIZATION 

sewing  one  kind  of  a  seam  or  running  a  machine  for  nailing  on 
heels.  Shoemaking  as  a  trade  has  disappeared  and  its  place  has 
been  filled  by  a  highly  specialized  industry. 

Certain  factories  make,  as  a  rule,  only  a  limited  class  of  shoes 
and  the  operations  of  making  them  have  become  most  highly 
specialized,  following  the  specialization  of  the  machinery,  and 
other  factory  influences  tending  to  extreme  division  of  labor. 
This  tendency  exists  everywhere,  the  influence  of  the  new 
methods  being  always  to  narrow  the  field  of  the  worker,  and  to 
require  more  special  skill  either  of  hand  or  mind. 

24.  Advantages  and  Disadvantages  of  Specialization.  The 
advantages  that  flow  from  specialization  should  be  noted. 
Obviously  the  product  can  be  produced  more  cheaply  than  under 
the  older  general  methods,  and  this,  in  itself,  should  benefit 
humanity.  It  is  indeed  this  basic  fact  that  has  given  these  new 
methods  such  a  strong  hold  upon  the  manufacturing  world. 
With  all  the  disadvantages  of  the  new  methods  they  have  added 
tremendously  to  the  comfort  of  living  and  can  be  made  more 
effective  in  this  direction  if  properly  controlled.  Because  of  the 
principle  of  the  extension  of  the  field  of  labor  (Article  10)  count- 
less thousands  of  men  and  women  are  now  employed  in  industries 
that  they  formerly  could  not  have  entered,  and  at  higher  wages 
than  they  could  ever  have  obtained  at  the  callings  otherwise  open 
to  them.  Undoubtedly  the  advantages  offset  the  disadvantages 
but  the  disadvantages  should  not  be  overlooked  or  forgotten. 
The  greatest  of  these  perhaps  is  the  destruction  of  the  old  trades 
and  the  disappearance  of  the  old,  all-around  mechanic.  This, 
in  itself,  would  not  be  so  bad  if  the  changed  conditions  allowed 
an  opportunity  for  those  coming  after  to  enter  industry  easily 
and  advantageously.1  But  the  passing  of  the  old  methods 
took  away,  also,  the  old  apprenticeship  systems  leaving  little  or 
no  provision  for  preparing  men  for  industry.  This,  however, 
while  serious  is  not  beyond  remedy.  The  change  was  so  sudden 

1  'The  situation  is  paralleled  in  other  lines.  Thus  the  advent  of  the  tramp 
steamer  with  its  specialized  crew  has  eliminated  the  sailing  vessel  with  its 
all-around  seamen.  But  no  one  would  deny  the  economic  advantage  of  the 
new  methods  though  many  may  deplore  the  passing  of  the  picturesque  old 
"wind-  jammer." 


MODERN   INDUSTRIAL   TENDENCIES  41 

that  manufacturers  and  educators  had  not  sufficient  time,  or  did 
not  realize  the  situation,  until  the  mischief  was  done.  To-day, 
however,  many  influences  are  at  work  tending  to  supply  this 
deficiency  in  our  industrial  system  and  there  is  great  reason  to 
hope  that  this  need  will  soon  be  met  (see  Article  19). 

Extreme  specialization  may  expose  a  factory  or  other  enter- 
prise to  serious  financial  outlay,  if  not  ruin,  because  of  sudden 
changes  in  processes,  or  new  inventions.  This  has  been  markedly 
so  in  the  New  England  weaving  industries  and  similar  highly 
specialized  enterprises  where  the  rapid  advance  in  machinery 
has  put  a  heavy  financial  burden  on  existing  factories,  thus 
favoring  new  manufacturers  seeking  an  entrance  into  the  field. 
Continuous  processes,  especially  those  depending  on  some 
chemical  reaction  for  their  methods,  are  always  in  danger  from 
new  and  more  economical  methods  especially  if  these  latter  are 
patentable.  A  highly  specialized  plant  may  often  be  at  a  dis- 
advantage, as  compared  with  one  less  specialized,  in  periods  of 
depression  when  certain  lines  of  product  may  not  be  in  demand 
while  others  may  be  in  good  demand.  / 

The  same  danger  may  face  a  man  who  is  highly  specialized. 
A  change  of  process  or  a  new  invention  may /almost  instantly 
eliminate  his  calling,  and  it  is  becoming  increasingly  difficult  for  a 
man  to  change  from  one  calling  to  another  of  equal  renumeration 
because  of  the  special  skill  required  in  each  calling.  The  tend- 
ency is  always  to  make  the  distance  between  the  worker  and  the 
tools  of  production  wider  and  wider,  with  an  increasing  need  of 
concerted  regulation  of  industry  to  compensate  for  these  dis- 
advantages. 

STANDARDIZATION. 

25.  Economic  Basis.  Specialization,  as  has  been  noted,  is  the 
confining  of  human  activity  to  a  limited  field.  In  industrial 
work  this  means  the  limitation  of  an  enterprise  to  a  portion  of  the 
field  and  to  the  production  of  a  limited  line  of  products.  But 
even  when  the  line  of  products  is  limited,  there  are  usually  many 
types  that  are  possible  in  that  line  and  an  infinite  number  of 
sizes  of  any  one  type.  Thus  suppose  a  manufacturer  specializes 
in  the  manufacture  of  men's  shoes.  Here  there  is  no  limit  to  the 


42     PRINCIPLES   OF   INDUSTRIAL   ORGANIZATION 

types  that  may  be  produced  and  no  limit  to  the  number  of  sizes  of 
any  type  since  no  two  feet  are  exactly  alike.  Again  a  manu- 
facturer may  specialize  on  the  production  of  motors  between  the 
sizes,  say,  of  one-half  horse-power  and  twenty  horse-power. 
Here  again  many  types  are  possible  and  an  infinite  number  of 
sizes  for  each  type.  But  it  has  been  shown  that  one  of  the 
essentials  of  cheap  production  is  quantity,  and  for  a  given  total 
output  the  greatest  number  of  each  element  entering  into  the 
product  is  secured  when  the  numbers  of  types  and  sizes  are  a 
minimum.  By  standardization  is  meant  the  reduction  of  any  one 
line  to  fixed  types  and  sizes.  Thus  in  the  case  of  the  manu- 
facturer of  shoes  he  selects  a  few  types  that,  in  his  opinion,  will 
find  favor  in  the  market.  But  each  foot  is  not  measured  and  a 
shoe  of  the  required  type  made  to  these  measurements.  A 
limited  number  of  sizes  of  each  type  is  manufactured,  these 
sizes  being  selected,  by  previous  experience,  so  that  any  average 
man  can  find  a  pair  that  will  fit  him.  The  same  holds  true  for 
the  case  of  electric  motors  discussed  above,  and  in  fact  for  the 
entire  field  of  manufactured  products.  Of  course  small  quantities 
and  special  machines  must  always  be  made  for  certain  con- 
ditions; but  wherever  goods  are  produced  in  quantity  the  above 
conditions  apply.  This  form  of  standardization  may  be  called 
the  method  of  the  average  solution.  It  is  applicable  to  all 
manner  of  goods  from  watches  to  locomotives.  The  basis  for  its 
use  is,  evidently,  economic  production.  It  is,  in  a  way,  an  ex- 
tension of  specialization. 

26.  Interchangeability.  There  is  another  and  very  important 
ground  for  standardization  and  that  is  the  desirability  of  having 
parts  interchangeable.  Standards  of  exchange  have  long  been  in 
general  use,  and  these  have,  most  usually,  been  fixed  with  a  view 
to  convenient  use  rather  than  on  a  scientific  basis.  The  units  of 
weight  and  measure  are  examples  of  this  form  of  standard.  They 
may  not  even  be  the  most  logical,  or  most  convenient,  but  once 
established  they  can,  in  general,  be  changed  only  by  slow  degrees, 
if  at  all. 

The  importance  of  such  standards  will  depend  on  the  extent 
r\f  their  use.  If  widely  used  they  may  be  definitely  fixed  in 


MODERN   INDUSTRIAL   TENDENCIES  43 

character  and  magnitude  for  the  protection  of  the  public  by 
legal  statute,  as  is  the  case  with  weights  and  measures,  thus 
securing  accurate  interchangeability  of  commodities.  Again 
standards  may  be  adopted  in  some  line  of  industry  for  the  pur- 
pose of  securing  interchangeability  of  product,  and  their  import- 
ance may,  through  growth,  be  of  such  universal  interest  that 
they  may  become  legally  fixed.  Thus  it  is  entirely  conceivable 
that  our  government  in  the  interests  of  shippers  and  others 
might  standardize,  say,  the  gauge  of  railway  tracks,  or  it  might 
legalize  industrial  standards,  such  as  screw  threads,  so  as  to 
secure  universal  interchangeability.  It  is  presumed,  usually,  that 
such  standards  have  been  determined  with  such  care  and  intelli- 
gence that  they  are  the  best  that  can  be  devised  for  the  pur- 
pose. This  is  not  always  true,  however,  and,  even  if  true,  a 
standard  that  is  satisfactory  to-day  may  be  far  from  being  so 
tomorrow.  The  present  system  of  gear  teeth  used  in  this 
country  was  very  satisfactory  until  the  problem  of  the  automo- 
bile drive  made  other  standards  desirable.  It  is  evident  that 
standardization  may  be  of  state,  national  or  even  international 
importance. 

Aside  from  the  consideration  of  standards,  as  viewed  from 
the  standpoint  of  general  use,  either  by  the  public  or  by  a  special 
industry,  each  shop  may  have  its  own  special  problem  in  stand- 
ardization. A  basic  principle  in  mass  production  is  that  every 
machine  element,  or  other  manufactured  part,  shall  be,  as  nearly 
as  possible,  exactly  like  every  other  similar  element  or  part. 
This  is  necessary  for  three  reasons.  Every  manufactured  prod- 
uct is,  in  general,  the  work,  not  of  one  man,  but  of  many  men 
and  is  built  up  on  the  assembly  floor  (or  corresponding  place) 
from  parts  made  by  workmen  who  may  never  see  the  finished 
product.  They  may  not  even  know,  when  doing  their  share 
of  the  work  on  the  particular  element  on  which  they  are  em- 
ployed, what  the  finished  product  may  be  like;  nor,  in  general; 
is  this  information  necessary  to  their  work.  A  modern  factory 
on  mass  production  is  like  a  river,  the  various  elements  flowina 
like  tributaries  from  the  different  departments  and  merging 
smoothly  into  the  stream  of  finished  product  that  goes  out 


44     PRINCIPLES   OF   INDUSTRIAL   ORGANIZATION 

through  the  shipping  room.  Clearly  the  success  of  such  methods 
depends  on  every  element  being  exactly  right  or  standard  as 
they  are  termed. 

Furthermore,  accuracy  of  form  in  every  element  is  important 
wherever  duplicate  parts  are  required.  With  machinery  built  by 
the  old-hand  methods  a  broken  part  could  be  replaced  only  by 
sending  it  to  the  factory  as  a  model,  or  sending  its  exact  measure- 
ments in  some  other  way.  To-day  all  manner  of  product,  from 
watches  to  locomotives,  are  manufactured  on  the  interchangeable 
system  and  repair  parts  may  be  ordered  by  number  from  the 
factory  with  a  good  assurance  that  they  will  fit  into  place  with 
little  or  no  work  upon  them.  And  even  when  the  question  of 
duplication  is  not  so  important,  the  very  fact  that  each  element 
must  pass  through  several  machines,  or  tools,  requires  accuracy 
and  duplication  of  form.  Thus  spare  parts  are  not  needed  in 
such  product  as  shoes,  and  the  accuracy  of  form  required  need 
not  be  so  important  as  in  making  fire-arms;  yet  even  in  work 
of  this  character  the  fact  that  each  element  must  pass  through 
more  than  one  machine  or  process,  and  the  avoidance  of  accumu- 
lated error  in  the  final  product  demand  duplication  and  accuracy 
of  form  unknown  in  the  old-hand  processes.  The  extent  to  which 
this  form  of  standardization  may  be  carried  will  depend,  of  course, 
on  the  quantity  to  be  made.  Accurate  duplication  of  parts  is 
dependent  on  the  character  and  extent  of  the  tools  employed 
and  these,  as  has  been  seen,  depend  on  the  quantity  to  be  made. 
The  degree  of  perfection  that  has  been  reached  in  mass  production 
in  America  is  remarkable,  and  the  method  as  before  noted  is 
being  applied  to  all  manner  of  manufactured  goods.  The 
modern  machine  processes  of  production  lend  themselves  most 
naturally  to  this  kind  of  work. 

Nor  does  the  idea  of  standardization  stop  with  the  considera- 
tion of  each  unit  of  product  by  itself.  The  same  standard 
part  may  be  used  for  several  machines.  Thus  the  same  bed- 
plate and  frame  may  do  for  motors  of  several  capacities;  a  careful 
study  of  several  sizes  of  machines  and  machines  of  different 
kinds  may  make  it  possible  to  use  the  same  part  or  parts  in  all  of 
them,  thus  still  further  reducing  the  number  of  kinds  of  parts 


MODERN  INDUSTRIAL   TENDENCIES  45 

and  increasing  the  quantity  of  each.  The  general  idea,  therefore, 
is  to  reduce  each  line  to  the  smallest  number  of  types  and  sizes, 
not  only  so  far  as  the  finished  units  are  concerned,  but  as  far  as 
the  idea  can  be  carried  down  into  the  details  of  manufacturing. 

The  idea  of  standardization  may  be  extended  to  other  and 
less  material  aspects  of  production.  Thus  if  it  is  possible  to 
find  out  which  of  several  methods,  or  sequence  of  methods,  will 
produce  best  results  in  doing  a  given  piece  of  work  the  best  com- 
bination may  be  recorded  and  used  as  a  standard  method  of 
procedure,  it  being  understood  that  this  particular  combination 
is  the  best,  until  some  other  better  way  is  devised.  Again  where 
the  element  of  time  is  concerned,  as  in  fixing  piece  rates,  a  record 
of  performance  will  enable  ihe  manager  to  establish  standard 
times  of  performance  that  are  valuable  not  only  for  setting  piece 
rates,  but  also  for  predicting  costs.  Just  as  material  standards 
tend  to  keep  up  the  accuracy  of  the  product,  so  standard  times 
and  methods  tend  to  raise  the  quantity  of  product. 

27.  Advantages  and  Disadvantages  of  Standardization.  The 
primary  advantage  of  standardization  is,  of  course,  reduced  cost. 
Not  only  is  this  true  of  the  direct  cost  of  production  due  to 
increased  quantity,  but  also  because  as  standardization  reduces 
the  required  number  of  elements  a  corresponding  decrease  in  the 
tools  required  naturally  follows.  The  indirect  expenses  also 
decrease  with  standardization.  Evidently  less  engineering  tal- 
ent and  less  clerical  help  and  superintendence  are  required  to 
handle  a  given  output  consisting  of  a  few  types  and  sizes  than  to 
handle  the  same  output  if  consisting  of  many  types  and  sizes. 
Standardizing  the  product  reduces  the  variety  of  stores  that  need 
to  be  carried  on  hand,  thus  reducing  the  investment  for  a  given 
output.  It  is  evident  that  much  more  prompt  delivery  of  prod- 
uct can  be  made  with  standardized  goods  than  with  those  that 
must  be  built  specially.  To  the  customer,  therefore,  standardi- 
zation insures  prompt  delivery,  lower  prices,  and  interchangeable 
parts. 

Of  even  greater  importance,  perhaps,  is  the  effect  that  stand- 
ardization has  on  the  quality  of  the  product.  Every  machine 
or  piece  of  finished  product  is,  in  the  first  instance,  more  or 


46     PRINCIPLES   OF   INDUSTRIAL   ORGANIZATION 

less  of  an  experiment,  becoming  increasingly  so  as  its  scientific 
and  mechanical  features  become  more  complex.  It  is  clear  that 
the  more  a  given  machine  is  worked  upon  and  the  oftener  it  is 
built,  the  more  perfect  it  will  be.  Standardized  product  is  likely 
to  be  more  satisfactory  than  special  product  for  this  reason, 
everything  else  being  equal,  and  the  customer  should  have  very 
good  reason  for  departing  from  standard  types  before  doing  so. 

Standardization  tends  to  concentrate  the  engineering  and 
manufacturing  talent  of  the  factory  with  a  consequent  high 
development  of  product* 

Standardization  has,  however,  some  serious  disadvantages, 
and  one  of  the  most  important  is  its  tendency  toward  inflexibility, 
and  hence  toward  impeding  progress.  Even  in  the  case  of 
standards  of  universal  use  this  tendency  is  felt.  Thus  the 
metric  system  of  weights  and  measures  possesses  many  advan- 
tages over  our  present  system;  but  there  are  so  many  serious 
objections  to  changing  our  standards  that  the  introduction  of 
the  metric  units  has  met  with  strenuous  opposition.  In  Eng- 
land an  antiquated  system  of  money  persists  because  of  these 
same  reasons.  The  standards  of  to-day  though  representing  the 
best  skill  and  knowledge  obtainable  may  be  inadequate  or 
unsuited  to  the  work  of  to-morrow.  Our  most  widely  used 
standards,  such  as  standard  weights  and  measures,  standard 
bolts,  flanges,  gear  teeth,  not  to  mention  our  scientific  standards, 
are  objects  of  constant  enquiry  and  criticism.  Once  a  standard 
becomes  widely  used  it  is  very  difficult  to  change1  it,  and  no  one 
matter  is  of  greater  importance  in  organizing  a  manufacturing 
industry  than  the  consideration  of  its  general  standards. 

And  these  same  criticisms  apply  to  standardized  product 
of  all  kinds.  Once  the  types  and  sizes  of  a  line  of  product  are 
fixed  for  mass  production  everything  pertaining  to  the  production 
is  standardized  as  far  as  possible.  Drawings,  patterns,  special 
machinery  and  operations  are  all  specially  arranged  for  the  work, 

1  No  better  example  of  this  can  be  found  than  in  a  people's  language. 
The  difficulties  experienced  in  trying  to  hasten  changes  in  our  own  spelling 
that  are  obviously  needed,  is  some  indication  of  the  difficulty  the  Chinese, 
for  instance,  would  have  in  modernizing  their  written  language. 


MODERN   INDUSTRIAL   TENDENCIES  47 

and  these  cannot,  usually,  be  changed  or  adapted  to  other  types 
except  at  great  financial  loss.  Special  tools  and  processes  are, 
as  a  rule,  absolutely  useless  except  for  the  purposes  for  which 
they  are  designed,  and  changes  in  type  and  size  almost  always 
mean  heavy  expenditures  for  new  special  appliances. 

It  has  been  said  that  America  stands  in  danger  of  losing 
her  manufacturing  supremacy  because  of  the  extreme  to  which 
mass  production  has  been  pushed  in  this  country.  The  tendency 
to  resist  change  or  improvement,  and  to  use  new  ideas  and  new 
patents  only  when  compelled  to  is,  no  doubt,  strong  where  mass 
production  prevails;  and  as  enterprises  become  larger,  and  com- 
binations of  interest  more  common,  this  tendency  may  become 
very  detrimental  to  progress.  Serious  as  these  drawbacks  may 
be,  they  in  no  manner  outweigh  the  advantages  that  accrue  from 
mass  production,  and  the  tendency  is  to  extend  the  method  in 
all  lines  as  fast  as  quantity  will  permit. 

DIVISION  OF  LABOR. 

28.  General  Principles.  It  is  human  experience  that  as  a  man 
concentrates  his  efforts,  either  mental  or  manual,  his  skill  in  his 
chosen  specialty,  and  the  quantity  of  his  product  increase.  It 
was  shown  in  Article  23  that  specialization  in  machinery  had  a 
powerful  influence  in  specializing  the  workman  and  thereby 
extending  the  principle  of  division  of  labor.  But  division  of 
labor  may  be  furthered  by  other  influences.  The  very  growth 
of  all  lines  of  human  knowledge  and  activity  makes  it  increasingly 
difficult  for  one  man  to  retain  a  grasp  of  any  one  entire  field.  He 
must  be  content  to  cultivate  a  small  portion  of  it.  Men  of 
leisure  may  still  cultivate  scholarly  habits  and  acquire  broad 
learning,  but  in  the  industrial  field  and  in  other  fields  such  as  law, 
medicine,  or  teaching,  or  in  fact  wherever  renumerative  service 
is  a  factor,  the  tendency  is  to  require  more  expert  knowledge  or 
skill  rather  than  the  older  forms  of  general  information.  Even 
then  the  total  knowledge  of  the  expert  may  exceed  that  of  the 
older  all-round  practitioner  so  vast  has  every  field  of  knowledge 
become,  while  his  expert  knowledge  or  skill  is  vastly  superior 
to  his  predecessors  in  the  particular  branch  in  which  he  has  been 


48     PRINCIPLES   OF   INDUSTRIAL   ORGANIZATION 

trained.  This  general  tendency  is  true  of  all  professions  as  well 
as  of  all  humble  callings. 

29.  Division  of  Mental  Labor.  The  term  division  of  labor  has, 
from  long  usage,  become  associated  in  the  public  mind  with 
manual  processes.  But  productive  labor  is,  in  general,  both 
manual  and  mental  and  just  as  there  may  be  division  of  manual 
labor  so  there  may  be  division  of  mental  labor  or  division  of 
thought.1  Modern  productive  methods  tend  constantly  to  sep- 
arate mental  labor  from  manual  labor  and  then  to  subdivide 
each  into  smaller  and  smaller  parts.  The  subdivision  of  manual 
labor  is  greatly  furthered,  as  has  been  seen,  by  the  extended  use 
of  tools.  Subdivision  of  mental  labor  on  the  other  hand  is 
hastened  by  an  increase  in  the  amount  of  knowledge  and  mental 
development  necessary  to  successfully  perform  the  work  in 
hand.  Thus  the  mental  labor  of  designing  machinery  is  per- 
formed largely  apart  from  the  actual  production;  and  this 
mental  labor  has  become  very  closely  specialized  as  the  scientific 
basis  of  engineering  has  grown.  This  process  of  subdivision 
is  greatly  hastened  in  both  manual  and  mental  operations  by 
increased  quantity  since  this,  of  itself,  enables  the  manager  to 
avail  himself  of  the  inherent  advantages  of  division  of  labor 
already  discussed. 

The  net  result  of  these  influences  is  to  subdivide  constantly 
all  lines  of  human  endeavor.  Thus  productive  industries 
are  usually  divided,  primarily,  into  three  branches,  namely, 
financing,  producing  and  selling,  the  work  of  the  first  and  last 
being  purely  mental.  The  productive  branch  is  again  divided 
into  planning  and  building,  as  illustrated  in  the  engineering  and 
production  departments  of  manufacturing  establishment.  This 
last  subdivision  should  be  carefully  noted,  as  it  is  one  of  the  best 
examples  of  a  clear-cut  division  of  the  mental  labor  of  production, 
so  far  as  design  is  concerned,  from  the  manual  work  of  actual 
production.  And  it  is  to  be  carefully  noted  that  the  same 
influences  that  split  factory  organization  into  these  fairly  well- 

1  These  basic  principles  which  lie  at  the  bottom  of  modern  factory  organi- 
zation and  administration  were  recognized  long  ago  by  Charles  Babbage. 
See  Economy  of  Manufactures,  pp.  169  and  191. 


MODERN  INDUSTRIAL   TENDENCIES  49 

defined  groups  are  still  at  work  internally  in  all  of  them.  The 
work  of  the  president  of  a  large  works  may  be  entirely  mental, 
while  that  of  some  of  his  assistants  may  be  entirely  of  a  manual 
character.  The  chief  engineer  of  a  large  works  does  almost  no 
manual  labor,  while  the  man  who  traces  drawings  does  little 
mental  work,  and  in  between  these  two  extremes  will  be  found 
all  gradations  of  combined  mental  and  manual  work.  The 
scope  of  the  department  of  a  works  engineer  extends  all  the  way 
from  planning  a  new  factory  to  the  actual  making  of  shop  tools 
and  fixtures. 

All  productive  processes  mental  and  manual  were  originally 
performed  in  the  shop  itself  and  in  the  case  of  very  small  shops 
this  is  often  still  the  case.  As  works  have  grown  in  magnitude 
the  continued  application  of  the  above  principles  has  taken 
out  of  the  shop  a  large  part  of  the  planning  or  mental  processes 
and  placed  it  in  separate  auxiliary  departments.  The  much 
discussed  methods  of  so-called  "  scientific  management  "  aim, 
among  other  things,  to  carry  the  process  still  farther  in  the 
actual  work  of  production.  They  aim  to  do  the  mental  labor  of 
production  in  a  separate  planning  department  and  to  predict  the 
results  of  productive  processes  in  a  manner  analogous  to  that  in 
which  the  engineering  department  conducts  the  scientific  part  of 
machine  design. 

30.  Summary.  The  economic  principles  and  natural  tenden- 
cies of  the  industrial  field  that  have  been  discussed  in  the  pre- 
ceding articles,  namely,  transfer  of  thought  and  skill,  division  of 
labor,  aggregation,  specialization  and  standardization  have  had, 
and  are  still  exerting,  important  and  far-reaching  influences,  not 
only  on  industrial  methods,  as  already  described,  but  also  upon 
industrial  ownership,  industrial  organization,  and  more  import- 
ant still,  upon  our  social  and  political  fabric. 

The  problems  of  ownership  and  organization  will  be  dis- 
cussed in  succeeding  chapters  and  it  remains  to  consider  here, 
very  briefly,  the  effect  of  these  tendencies  upon  the  workman. 

As  before  noted  the  first  effect  of  these  influences  is  always 
to  subdivide  labor  and  to  specialize  men.  This  has  already 
resulted  in  the  disintegration  of  most  of  the  old  trades  and  the 


50     PRINCIPLES   OF   INDUSTRIAL   ORGANIZATION 

substitution  in  their  place  of  specialized  men  of  many  grades, 
varying  from  the  manager  or  designer  whose  work  is  purely 
mental,  down  to  the  operative  of  whom  little  skill  and  almost 
no  mental  effort  are  required.  Each  worker,  however,  is  more 
highly  skilled  and  more  productive  in  the  particular  operation 
that  he  performs  than  was  his  many-sided  predecessor,  the 
"  all-around  "  mechanic.  This  specialization,  .of  itself,  is  not  so 
deplorable  as  might  appear  at  first  sight.  It  is  not  considered 
deplorable  that  a  doctor  specializes  on  one  organ  of  the  human 
body  or  even  on  one  disease  of  that  organ;  nor  that  teachers 
now  specialize  in  a  few  subjects,  rather  "than  trying  to  cover 
the  whole  realm  of  human  knowledge.  It  is  only  in  the  cases 
where  the  operations  are  repeated  rapidly,  and  require  little  skill 
or  mental  effort,  but  great  concentration  of  attention  that  spe- 
cialization becomes  a  menace  to  the  worker.  More  enlightened 
management  will  see  to  it  that  operators  on  such  work  obtain 
the  relaxation  necessary  to  such  work  or  communal  regulation 
of  some  sort  will  insist  upon  it,  as  it  has  upon  other  similar 
reforms. 

There  is  one  effect  of  specialization,  however,  that  should 
be  carefully  noted.  Specialization  tends  to  classify  men;  and  as 
the  numbers  of  any  class  increase  the  individual  loses  his  person- 
ality in  that  of  the  class.  He  becomes,  to  the  manager,  simply 
one  man  out  of  many,  all  rated  alike,  and  unknown  to  him 
perhaps,  by  looks  or  even  name,  a  numbered  cog  in  the  great 
machinery  of  the  works.  The  gap  between  the  worker  and  the 
ownership  of  the  tools  of  production  is  still  farther  widened  by 
specialization  and  he  becomes  more  and  more  dependent  for  his 
daily  bread  on  conditions  over  which  he  has  little  or  no  control. 
Recognition  of  such  superior  qualities  as  he  may  possess  either 
as  a  man  or  as  a  mechanic  becomes  increasingly  difficult,  the 
tendency  of  these  influences  being  to  standardize  men  in  classes 
and  fix  their  wages  accordingly. 

What  more  natural  than  that,  under  these  circumstances, 
the  best  of  men  should  turn  to  organization  as  a  means  of  keeping 
the  average  wage  of  their  class  as  high  as  possible?  As  the 
individuality  of  the  worker  is  merged  into  that  of  a  class,  the 


MODERN   INDUSTRIAL    TENDENCIES  51 

class  naturally  reflects  only  the  common  attitude  and  ideals  of 
the  individuals  composing  it,  bearing  on  the  object  sought. 
Organization  brings  a  sense  of  power,  and  the  demand  of  the 
class  is  not  what  the  several  individuals  of  the  class  may  be 
worth  but  a  demand  for  as  much  as  it  can  wrest  from  the  em- 
ployer. Everyone  that  has  had  experience  knows  that  when 
men  are  classified  and  standardized  the  amount  of  work  done 
by  the  better  man  falls  off  as  his  individuality  is  lost  in  that 
of  the  class,  .the  standard  of  output  tending  toward  that  of 
the  lowest  producer.  On  the  other  hand,  as  has  been  shown,  the 
demand  of  the  class  always  tends  to  approach  or  exceed  the  com-  Jj 
pensation  due  the  best  worker.  This  condition  is  fair  neither  to  \  * 
employer  nor  employee  and  is  the  most  difficult,  and  at  the  same 
time  the  most  important  problem  of  modern  industry.  It  will  be 
referred  to  again  in  discussing  the  problem  of  compensation  of 
labor  (see  Chapter  XI). 


CHAPTER  VI. 

FORMS   OF  INDUSTRIAL   OWNERSHIP. 

31.  General.     The  foregoing  chapters  will  have  made  it  clear 
that    industrial   organizations    tend   to    become   larger,    partly 
because  of  the  inherent  advantages  of  the  large  plant  that  comes 
from  production  in  quantity,  and  also  because  as  the  industrial 
field  broadens,  undertakings  become  larger  in  size  and  require 
larger  plant  and  capital  to  operate  them  successfully  (see  Article 
21).     Growth,  as  already  noted,  almost  necessarily  involves  a 
change  in  the  manner  of  organization  of  nearly  all  kinds  of  in- 
dustrial undertakings,  and  may  also,  though  not  necessarily, 
require  changes  in  the  manner  in  which  the  undertaking  is 
owned.     It  is  important  to  have  clearly  in  mind  the  several 
ways  in  which  a  plant  may  be  owned.     These  are 

(1)  Individual  ownership. 

(2)  Partnership. 

(3)  Joint  Stock  Association. 

(4)  Corporation. 

Any  undertaking  large  or  small  may  be  owned  in  any  one 
of  these  four  ways.  Large  undertakings  are  usually  owned  by 
corporations  for  reasons  that  will  follow,  but  there  are  many 
instances  of  very  large  undertakings  that  are  held  individually. 

32.  Individual   Ownership.     This   form   of   ownership   is,   of 
course,  the  oldest  and  simplest  and,  in  some  respects,  the  most 
natural.     Its  characteristics  are  the  same  no  matter  how  small 
or  how  large  the  undertaking  may  be.     The  individual  pro- 
prietor is  the  supreme  judge  of  all  matters  pertaining  to  his 
business,  subject  only  to  the  general  laws  of  the  land  and  such 
special  legislation  as  may  affect  his  particular  business.     He 
may  hire  whom  he  pleases,  and  delegate  such  powers  as  he  pleases 
to  his  employees.     He  may  also  conduct  any  and  all  lines  of 
industry  that  he  wishes  to,     The  entire  responsibility  and  author- 

52 


FORMS   OF   INDUSTRIAL   OWNERSHIP  53 

ity  belong  to  him  personally  and  the  profits  or  losses  are  his 
own.  His  legal  liability,  on  the  other  hand,  covers  all  his  pos- 
sessions. The  individual  owner  is  not  required  to  be  legally 
registered,  thus  giving  public  notice  of  his  business  intentions, 
unless  he  wishes  to  operate  under  an  assumed  name,  in  which 
case  he  must  usually  register  with  some  public  official,  and 
make  a  full  statement  regarding  the  business  which  he  intends  to 
establish,  and  state  the  name  of  the  person  responsible  for  all 
obligations  and  liabilities  of  the  enterprise. 

33.  Partnership.  As  enterprises  grow  large  the  method  of 
individual  ownership  may  become  inadequate.  The  duties  and 
responsibilities  may  become  too  arduous  for  a  single  individual 
or  the  proprietor  may  desire  to  encourage  valuable  employees  by 
a  share  in  the  profits.  He  may  wish  to  associate  with  him  men 
having  capital  or  special  skill  and  knowledge,  so  that  for  reasons 
of  finance,  personal  liking  or  commercial  gain,  a  partnership  is 
formed.  In  these  days  of  large  undertakings  a  partnership  is 
often  formed  at  the  beginning  of  the  enterprise  for  reasons  that 
are  obvious. 

A  partnership,  or  firm  as  it  is  often  called,  is,  then,  a  group 
of  men  who  have  joined  capital  or  services  for  the  prosecuting 
of  some  enterprise.  The  exact  relations  and  agreements  that 
may  exist  between  or  among  them  may  vary.  Thus  one  man 
may  contribute  capital,  another  experience  or  services,  and 
another  may  contribute  prestige,  in  any  way  that  may  be  agree- 
able and  satisfactory. 

The  law,  in  general,  allows  a  partnership  as  much  freedom  as 
an  individual  in  transacting  business,  and  a  partnership  like  an 
individual  owner  may  engage  in  almost  any  number  of  legitimate 
enterprises  without  legal  restriction. 

It  is  evident,  however,  that  since  more  than  one  proprietor 
is  interested  in  the  business  it  is  important  that  the  rights, 
responsibilities,  and  obligations  of  a  partnership  shall  be  legally 
defined;  hence  there  is  in  all  states  a  considerable  amount  of 
legal  enactment  regulating  partnership.  The  necessity  of  this 
regulation  is  clearer  when  it  is  considered  that  every  member  of 
a  partnership  retains  certain  personal  rights  and  obligations  that 


54     PRINCIPLES   OF   INDUSTRIAL   ORGANIZATION 

are  not  merged  into  his  rights  and  obligations  as  a  partner.  Thus, 
in  general,  the  law  holds  the  firm,  and  each  and  every  member 
thereof,  legally  and  morally  liable  for  any  and  all  acts  of  every 
other  member,  committed  in  the  name  of  the  firm  and  within  the 
scope  of  his  authority  as  a  member  of  the  same.  Each  partner  is 
responsible,  financially,  for  all  debts  and  obligations  of  the 
partnership,  and  judgment  may  be  obtained  and  collection 
executed  against  the  private  property  of  the  individual  partners 
if  the  assets  of  the  firm  are  not  sufficient  to  cover  the  obligations 
of  the  firm.  On  the  other  hand,  a  partner  is  not  responsible  for 
the  personal  obligations  of  his  co-partner  incurred  outside  of  the 
scope  of  his  authority  as  a  member  of  the  firm.  If  a  partner  has 
financial  difficulties,  for  instance,  in  building  himself  a  residence, 
or  if  he  should  commit  a  felony  in  some  way  not  connected 
with  the  business  of  his  partnership,  the  firm  is  not  liable,  since 
these  acts  were  not  within  the  scope  of  his  authority  as  a  member* 
of  the  firm.  In  fact  a  man  might  be  a  partner  in  several  enter- 
prises and  would  be  responsible  in  such  a  case  for  the  obligations 
of  each  firm  only  as  far  as  his  acts  were  within  his  authority  as 
a  member  of  each. 

While  the  law,  in  general,  allows  a  partnership  almost  as 
much  freedom  as  an  individual  there  is  one  form  of  partnership 
that  is  a  little  more  closely  restricted,  namely,  that  which  is 
known  as  a  limited  partnership.  In  this  form  of  organization  a 
partner  may  enter  a  firm  under  the  condition  that  his  liability  or 
obligation  is  limited  to  the  amount  of  his  contributed  capital. 
In  such  a  case  the  firm  must  file  a  certificate  with  the  proper 
official  stating  who  the  partners  are,  the  extent  of  their  liability, 
the  place  of  business,  etc.,  and  give  such  publicity  to  its  organ- 
ization as  may  be  necessary  to  protect  those  doing  business  with 
them.  Usually  the  capital  of  each  limited  partner  must  be  paid 
in  and  there  must  be  one  unlimited  partner  whose  liability  is  not 
limited.  This  form  of  partnership  is  not  very  common. 

34.  Joint  Stock  Association.  A  joint  stock  association  is  a 
partnership  with  certain  peculiar  features  that  bear  some  re- 
semblance to  those  of  a  so-called  corporation  which  will  be 
described  later.  Its  organization  must  be  authorized  by  law, 


FORMS  OF  INDUSTRIAL  OWNERSHIP  55 

and  it  may  assume  a  corporate  name.  It  may  issue  stock  to  its 
members  and  this  stock  is  transferable.  It  is  formed,  however, 
by  mutual  agreement  of  the  members,  and  no  publication  of  its 
articles  of  organization  is  required.  A  joint  stock  association 
may  sue  a  member  and  may  be  sued  by  its  members.  The 
members,  however,  are  individually  liable  for  all  debts  and 
obligations  of  the  association  after  the  property  of  the  asso- 
ciation is  exhausted.  This  form  of  organization  is  of  little 
utility  and  is  not  often  used.  The  name,  however,  should  not 
be  confused  with  that  of  stock  corporations  which  are  much 
different  in  character. 

CORPORATIONS. 

35.  Nature  and  Classification.  A  corporation  is,  by  nature, 
an  artificial  person  created  or  authorized  by  legal  statute  for 
some  specific  purpose.  It  can  have  only  such  rights  and  privi- 
leges as  are  conferred  upon  it  by  law.  These  rights,  privileges 
and  obligations  vary  in  different  states,  depending  on  the  nature 
of  the  business  and  the  force  of  public  opinion.  A  corporation 
is  composed,  usually,  of  a  number  of  persons;  but  it  should  be 
especially  noted  that  these  members  or  stockholders  are  not  the 
corporation,  which  has  an  entity  of  its  own  and  an  existence 
entirely  apart  from  that  of  its  individual  members.  Conse- 
quently a  corporation  can  carry  on  business  in  its  own  name  only. 
A  stockholder  in  a  corporation  is,  usually,  not  liable  for  his  in- 
debtedness beyond  the  amount  of  his  stock,  differing  radically  in 
this  respect  from  a  partnership.  In  former  times  this  was  not  so, 
and  there  are  still  special  cases  where  the  stockholder  is  liable 
for  more  than  his  holdings  but,  as  a  general  rule,  his  liabilities 
are  limited  to  the  value  of  his  stock.  A  stockholder  may  do 
business  with  the  corporation,  entering  into  a  contract  with  it. 
He  may  sue  it  and  he  may  be  sued  by  it.  In  a  corporation  any 
man  may  sell  his  stock  at  will  and  any  man,  who  may,  can  buy 
an  interest  in  the  form  of  stock  holdings.  In  this  respect,  again, 
the  corporation  differs  radically  from  the  partnership  in  which  no 
member  can  transfer  his  share  of  interest  to  anyone  without  the 
consent  of  the  other  members  of  the  firm. 


56   PRINCIPLES  OF  INDUSTRIAL  ORGANIZATION 

A  corporation,  as  before  noted,  must  be  created  by  law. 
Individual  owners  may,  as  before  stated,  engage  in  any  legit- 
imate business  without  public  notice,  but  in  order  to  organize 
a  corporation,  a  certificate  of  incorporation  must  be  filed  with 
the  proper  authorities.  This  certificate  must,  in  general,  contain 

(1)  The  name  of  the  proposed  corporation. 

(2)  The  purposes  for  which  it  is  to  be  formed. 

(3)  The  amount  of  capital  stock  and  its  division  into  common 
and  preferred  stock  if  there  is  such. 

(4)  The  number  of  shares  of  capital  stock  and  the  value  per 
share.     Maximum  and  minimum  limiting  values  are  sometimes 
placed  by  law  on  the  value  of  shares. 

•(5)  The  location  of  the  principal  business  office  of  the  cor- 
poration. 

(6)  The  number  of  its  directors  with  the  names  and  addresses 
of  the  original  directors. 

(7)  The  names  and  addresses  of  the  subscribers  to  the  certifi- 
cate and  the  number  of  shares  that  each  agrees  to  take.     The 
state  will  then  issue  a  charter  to  the  organizers,  authorizing 
them  to  engage  in  the  proposed  business.     A  corporation  is  not, 
in  general,  permitted  to  engage  in  a  business  not  fairly  within 
the  provisions  of  its  charter,  though  the  charter  may  be,  and  in 
the  case  of  large  corporations  usually  is,  very  broad  and  liberal. 

Corporations  are  used  for  such  a  wide  range  of  purposes 
that  classification  based  on  the  purposes  for  which  they  are 
formed  is  useless  and  confusing.  Thus  corporations  may  be 
forrned  to  manage  a  college  or  a  church,  an  industrial  enterprise, 
_— aTrailway  system,  a  bank,  or  in  fact  almost  any  human  activity. 
The  only  line  of  demarcation  that  is  logical  or  useful  divides 
corporations  into 

(1)  Public  corporations. 

(2)  Private  corporations. 

Public  corporations  are  those  formed  by  a  community  for 
governmental  control  and  are  often  called  municipal  corpora- 
tions. In  general,  all  other  corporations  are  classed  as  private 
corporations.  Corporations  formed  to  operate  utilities  that 
serve  the  public,  such  as  railroads,  gas  and  electric  lighting 


FORMS  OF  INDUSTRIAL  OWNERSHIP  57 

plants,  telephones,  and  telegraph  systems,  are  sometimes  called 
quasi-public  corporations,  but  if  they  are  conducted  for  private 
gain  they  are  properly  classed  as  private  ventures.  The  ser- 
vices which  this  class  of  corporations  render  make  them  much 
more  interesting  and  important  to  the  public,  and  they  are  in- 
creasingly liable  to  close  regulation  by  legislation;  nevertheless, 
if  conducted  for  private  gain,  they  are  not  public  corporations. 
The  control  by  the  public  of  quasi-public  corporations  is  espe- 
cially important  in  a  service  that  is  a  natural  monopoly.. 

36.  Capital  and  Capital  Stock.  The  capitalization  or  capital 
stock  of  a  corporation  is  the  nominal  capital  authorized  by  its 
charter;  that  is,  the  number  of  authorized  shares  multiplied 
by  their  par  or  face  value  as  fixed  by  the  charter.  These  shares 
of  stock  are  freely  transferable  and  may  be  bought  and  sold  at 
the  market  price  like  any  other  commodity.  When  a  person 
acquires  an  interest  in  a  corporation  he  is  said  to  become  a 
stockholder  and  his  interest  is  expressed  in  shares  of  stock. 
The  visible  evidence  of  ownership  is  the  stock  certificate  which 
certifies  that  the  person  whose  name  appears  on  the  certificate 
owns  a  specific  number  of  shares.  Since  these  certificates  are 
freely  transferable,  it  follows  that  the  ownership  of  a  corpora- 
tion may  be,  and  often  is,  a  constantly  shifting  body.  Any 
purchaser  of  stock  can  have  the  certificates  that  he  acquires 
exchanged  for  new  certificates  made  out  in  his  name,  by  pre- 
senting the  old  certificates  properly  endorsed  by  the  former 
owner.  The  corporation  recognizes  as  voters  only  those  whose 
names  are  listed  on  its  stock  books  at  the  time  of  voting,  and 
the  voting  power  of  a  member  is  measured  by  the  number  of  his 
shares.  The  interest  that  any  stockholder  possesses  in  a  cor- 
poration by  virtue  of  his  possession  of  stock  certificates  is  an 
undivided  interest;  that  is,  he  cannot  withdraw  the  value  rep- 
resented by  his  certificate  from  the  corporation  which,  as  before 
stated,  is  an  entity  that  cannot  be  divided  unless  the  affairs  of 
the  concern  are  closed  up  and  the  residual  assets  after  liquidating 
all  liabilities  divided,  in  which  case  each  stockholder  would  re- 
ceive his  pro-rata  share. 

The  entire  amount  of  stock  authorized  by  the  charter  of  a 


58     PRINCIPLES   OF   INDUSTRIAL   ORGANIZATION 

corporation  need  not  necessarily  be  issued.  When  stock  cer- 
tificates are  issued,  and  paid  for  in  full,  they  are  designated  as 
full  paid.  If  any  authorized  stock  remains  unissued  it  is  called 
unissued  stock.  Evidently  such  unissued  stock  has  potential 
value  only  and  cannot  be  considered  an  asset.  If  stock  is  issued 
and  paid  for  in  full  and  then  by  gift  or  purchase  comes  again 
into  the  possession  of  the  corporation  it  is  called  treasury  stock 
and  is  usually  treated  as  an  asset. 

Stock  may  be  of  two  kinds,  namely,  common  or  preferred. 
Common  stock  is  the  general  or  ordinary  stock  of  a  corporation 
which  has  neither  special  privilege  or  restriction  of  any  kind. 
Preferred  stock  is  stock  having  some  special  preference  over 
other  kinds  in  the  matters  of  dividends  or  assets  of  the  corpo- 
ration. Thus  a  corporation  may  issue  both  common  and  pre- 
ferred stock,  binding  itself  to  pay  a  definite  dividend  on  the 
preferred  stock  before  any  common  stock  can  receive  a  dividend. 
In  some  states  it  is  provided  by  law  that  preferred  stock  may 
not  receive  over  a  given  per  cent  of  the  par  value  in  dividends. 
After  the  dividends  on  preferred  stock  are  paid  the  remainder 
of  the  profits  are  usually  divided  equally  among  the  common 
stock,  though  sometimes  the  preferred  stock  also  participates 
with  the  common  stock  in  such  further  distribution  of  profits. 

The  difference  between  preferred  stock  and  a  bond  should  be 
carefully  noted.  Dividends  on  preferred  stock,  or  common 
stock,  can  be  paid  only  if  there  is  a  profit.  Interest  on  a  bond 
must  be  paid  whether  there  is^a  profit  or  not.  It  is  an  obliga- 
tion usually  incurred  by  borrowing  money,  giving  a  bond,  which 
is  secured  by  a  mortgage  on  the  real  property,  as  a  guarantee. 
The  interests  of  bondholders  and  stockholders  may,  therefore, 
be  radically  opposed.1  A  bondholder  will  be  desirous  of  keep- 
ing the  real  capital  of  the  company  intact  since  that  is  his  se- 
curity. A  stockholder  is  interested  in  dividends  and  does  not 
usually  care  whether  they  come  out  of  profit  or  are  a  part  of 
the  capital  itself,  as  is  sometimes  the  case  where  works  are 
badly  managed. 

1  These  differences  of  interest  are  often  important  in  such  matters  as 
appraisement  and  depreciation.  See  Article  87. 


FORMS  OF  INDUSTRIAL  OWNERSHIP  59 

A  clear  distinction  should  be  made,  also,  between  the  capital 
stock  of  a  corporation  and  the  assets  or  actual  property  that  the 
stock  is  presumed  to  represent.  The  capital  stock,  as  before 
noted,  is  the  total  amount  of  the  stock  authorized  by  the  char- 
ter. It  is  fixed  by  the  charter  and  may  not  be  changed  except 
by  authority  of  the  state.  The  true  value  of  the  property  that 
the  corporation  possesses  may  or  may  not  be  the  same  as  the 
capital  stock. 

In  conservative  enterprises  the  capital  stock  usually  cor- 
responds, in  the  beginning,  to  the  actual  value  of  the  assets,  that 
is,  for  every  dollar  of  stock  issued  by  the  corporation  it  receives 
a  dollar  in  cash  or  property.  When,  however,  the  enterprise 
becomes  active,  the  actual  value  of  the  assets  may  be  greater 
or  less  than  the  capitalization,  depending  on  the  success  of  the 
business.  In  enterprises  of  a  speculative  character  the  capital 
stock  is  often  intentionally  fixed  greatly  in  excess  of  the  value 
of  the  real  assets,  either  to  sell  the  stock  profitably  at  a  price 
below  its  apparent  value,  or  in  the  hope  that  the  future  earnings 
will  justify  the  capitalization.  Such  enterprises  are  said  to  be 
over-capitalized  and  the  stock  is  said  to  be  watered.  The  same 
result  occurs  when  a  corporation  takes  over  a  property,  issuing 
stock  certificates  in  payment  thereof,  the  face  value  of  which 
is  greatly  in  excess  of  the  real  value  of  the  property  taken  over. 
Even  in  such  cases,  however,  there  may  be  intangible  assets 
such  as  good  will,  trade-marks,  etc.,  that  may  justify  the  over- 
capitalization so  far  as  earning  power  is  concerned.  In  fact  in 
some  enterprizes,  such  as  magazines  and  other  publications,  the 
greatest  asset  that  they  possess  is  good  will,  or  "  capitalized  earn- 
ing power  "  as  it  has  been  called,  and  in  the  case  of  a  successful 
publication  this  may  be  a  very  valuable  asset,  though,  strictly 
speaking,  an  intangible  one.  There  is,  nevertheless,  a  growing 
tendency  to  prohibit  the  watering  of  stock. 

The  net  worth  of  a  business  is  the  difference  between  its  assets 
and  its  liabilities.  In  a  corporation  the  net  worth  is  equal  to 
the  par  value  of  the  capital  stock,  plus  the  surplus  or  minus  the 
deficit  due  to  trading,  at  the  time  under  consideration.  If 
there  are  no  liabilities  the  net  worth  is  the  value  of  all  the  assets 


60     PRINCIPLES   OF   INDUSTRIAL   ORGANIZATION 

possessed  by  the  corporation.  The  market  value  of  a  share  of 
stock  will  depend,  therefore,  on  the  relation  that  exists  between 
the  net  worth,  the  amount  of  stock  issued,  and  the  earning  power 
of  the  corporation.  If  the  net  worth  is  greatly  in  excess  of  the 
issued  stock,  and  if  the  dividends  be  high  the  value  of  each  share 
of  stock  is  enhanced  and  it  may  sell  at  a  price  considerably  above 
par.  If  the  dividends  should  fall,  without  change  in  the  net 
worth,  the  market  price  of  the  stock  would  decrease  so  that 
even  in  such  a  case  it  might  sell  below  par.  If  the  net  worth 
decreases,  the  stock  may  fall  in'  value  even  though  the  earning 
capacity  remains  good;  while  it  is  evident  that  any  variation 
in  the  earning  power  will  cause  a  similar  variation  in  the  market 
value  of  the  stock.  The  effects  of  these  influences  are  modified, 
also,  by  the  general  reputation  and  standing  of  the  enterprise 
and  the  consequent  confidence  that  the  public  may  have  in  the 
success  of  the  venture.  It  should  be  noted  that  the  term  net 
worth  as  here  used  is  not  synonomous  with  actual  net  value,  since 
the  assets,  as  before  noted,  may  contain  intangible  assets  which, 
nevertheless,  are  often  very  valuable. 

The  assets  of  a  concern  that  are  permanent  in  nature,  such  as 
buildings,  real  estate,  machinery,  etc.,  are  known  as  fixed  as- 
sets. Assets  that  are  constantly  changing  in  character  and 
relative  amounts,  such  as  cash,  accounts  and  notes  receivable, 
merchandise,  etc.,  are  called  quick  or  current  assets  or  floating 
capital. 

37.  Corporate  Organization.  Directorate.  The  actual  ad- 
ministration and  management  of  a  corporation  is  vested  in  a 
board  of  directors  elected  by  the  stockholders,  most  usually  for 
a  term  of  one  year.  (Bondholders,  it  will  be  noted,  have  no 
vote.)  The  directors  elect  the  officers  of  the  company  and  ap- 
point all  important  officials.  In  some  states  the  law  requires 
that  certain  specified  officers,  such  as  president,  secretary  and 
treasurer,  shall  be  elected  or  appointed.  In  large  organizations 
there  are  usually  a  number  of  vice-presidents,  each  at  the  head 
of  an  important  branch  of  the  work,  the  exact  organization  vary- 
ing with  the  work.  (See  Article  41.)  The  powers  that  may  be 
vested  in  any  one  officer  will,  of  course,  vary  with  circumstances. 


FORMS   OF  INDUSTRIAL  OWNERSHIP  61 

Very  often  an  executive  committee  composed  of  a  small  number 
of  directors  that  can  be  called  together  quickly  and  easily  for 
consultation  with  the  president,  or  general  manager,  is  given 
large  discretionary  powers,  but,  in  general,  very  important  is- 
sues are  settled  by  the  full  board  of  directors.  The  question  of 
directorship  is,  hence,  an  important  one  and  often  leads  to 
strenuous  efforts  to  obtain  control  of  stock  so  as  to  influence 
the  election  of  these  important  administrative  officers. 

38.  Advantages  and  Disadvantages.  The  corporate  form  of 
organization  has  several  advantages  over  the  simple  partner- 
ship. Evidently  a  large  number  of  people  can  participate  in 
an  enterprise  by  this  method  and  a  large  amount  of  capital  can 
be  assembled  by  this  method,  though  no  one  stockholder  may 
be  a  large  investor.  The  method,  therefore,  lends  itself  readily 
to  enterprises  involving  large  capital  outlay.  There  is  an  ele- 
ment of  permanency  about  a  corporation  that  cannot  be  attained 
by  a  partnership  since  the  continuity  of  a  corporation  is  not 
seriously  affected  by  a  change  in  either  the  management  or 
the  owners.  The  death  of  a  partner  may  seriously  affect  a 
partnership  and  the  death  of  a  single  proprietor  may  close  up 
the  business;  but  the  death,  or  withdrawal,  of  any  number  of 
stockholders  or  directors  does  not  necessarily  affect  the  corpo- 
ration which,  as  before  noted,  has  an  entity  of  its  own.  Dis- 
putes over  the  ownership  of  stock,  even  in  adjusting  the  estates 
of  the  deceased,  can  have  no  effect  on  the  corporation.  In 
fact,  enterprises  that  are  really  individually  owned  are  some- 
times incorporated,  the  owner  giving  or  selling  a  few  shares  to 
friends  or  relatives  so  that  the  business  may  be  organized  in 
such  a  manner  as  will  insure  its  continuance  after  his  death. 
For  these  reasons  there  is  an  increasing  tendency  to  incor- 
porate industrial  enterprises.  The  Bulletin1  of  Manufacturers 
of  the  Thirteenth  Census  of  the  United  States  reports  that  in 
1904,  23.6  per  cent  of  the  total  number  of  manufacturing  es- 
tablishments of  the  country  were  incorporated  and  in  1909  the 
percentage  had  risen  to  25.9.  The  corresponding  percentages 

1  See  Thirteenth  Census  of  the  United  States  —  Bulletin  of  Manufacturers, 
p.  24. 


62     PRINCIPLES   OF  INDUSTRIAL  ORGANIZATION 

of  the  value  of  the  goods  manufactured  for  the  same  years  is 
given  as  73.7  and  79  per  cent  of  the  totals. 

On  the  other  hand,  the  buying  of  stock  in  any  incorporated 
enterprise  requires  care  and  insight  for  success.  From  the 
foregoing  it  is  clear  that  assets  and  capital  stock  are  two  very 
different  things  and  unless  a  buyer  has  a  good  knowledge  of  the 
real  state  of  the  affairs  of  the  corporation  in  which  he  invests 
the  investment  is  more  or  less  of  a  hazard.  Again,  stockholders 
who  do  not  agree  with  the  methods  of  the  managing  directors 
have  no  means  of  changing  those  methods  if  they  are  a  minority 
of  the  stockholders.  If  the  majority  of  the  stock  is  held  by  a 
few  men  they  can  dominate  the  policy  of  the  business  without 
regard  to  the  opinions  of  the  minority. 

The  many  and  varied  issues  that  have  arisen  in  connection 
with  corporations  have  given  rise  to  a  large  number  of  legal 
enactments  known  usually  as  corporation  law.  As  enterprises 
have  grown  in  size  and  power  they  have  in  very  many  cases  not 
only  evaded  the  limitations  of  the  law  but  have  been  oppressive 
to  other  interests.  There  is  an  ever-increasing  tendency  to  reg- 
ulate all  forms  of  corporate  ownership  much  more  strictly  than 
in  the  past,  especially  where  the  enterprise  is  of  a  quasi-public 
nature.  This  legal  regulation  of  corporate  organization  is  one 
of  the  most  important  and  also  most  difficult  problems  that 
faces  us  to-day.  As  has  been  shown  in  Article  21  the  natural 
tendency  of  all  successful  enterprises  is  to  increase  in  size  be- 
cause of  economic  considerations.  To  permit  corporations  to 
grow  to  large  sizes  and  at  the  same  time  to  insure  the  return  to 
the  common  people  of  the  benefits  so  derived  seems  to  be  no 
easy  task. 

39.  Cooperative  and  Governmental  Ownership.  No  dis- 
cussion of  industrial  ownership  would  be  complete  without  brief 
notice,  at  least,  of  cooperative  ownership,  though  anything  ap- 
proaching an  adequate  discussion  of  this  phase  of  the  subject  is 
far  beyond  the  scope  of  this  book.  Cooperative  ownership  as  a 
means  of  obviating  the  evils  of  the  present  industrial  system 
has  been  advanced  by  many  able  men1  ever  since  the  inception 
1  See  Life  of  Robert  Owen,  by  Lloyd  Jones. 


FORMS   OF   INDUSTRIAL   OWNERSHIP  63 

of  the  factory  system.  Theoretically,  it  would  seem  possible 
that  men  could  combine  their  interests  and  share  their  profits 
fairly  and  amicably;  but  in  the  practical  working  out  of 
such  schemes  there  are  many  difficulties.  Such  schemes  are  not 
new1  and  under  simple  conditions  of  living  and  more  uniform 
requirements  of  those  concerned  than  can,  as  a  usual  thing,  be 
found  in  the  present  industrial  world,  such  schemes  may  be 
successfully  operated.  In  fact,  in  the  present  era,  those  co- 
operative schemes  of  large  size  that  may  lay  claim  to  any  great 
degree  of  success  have  been  operated  mostly  by  people  held 
together  by  some  kind  of  artificial  bond,  as  for  instance  some 
form  of  common  religion  that  has  had  a  unifying  and  levelling 
effect. 

If  the  requirements  of  the  industrial  field  were  uniform  and 
if  all  men  were  equally  able,  mentally  and  bodily,  the  case  would 
be  different.  The  needs  of  the  industrial  field  are  many  and 
varied,  requiring  men  of  all  grades  and  capacities;  and  the 
diverse  requirements  of  the  field  are  equalled  only  by  the  dif- 
ferences in  the  capacities  and  abilities  of  men.  Even  though 
common  ownership  in  comparatively  small  undertakings  be 
granted  as  a  possibility,  the  equal  division  of  profits,  so  much 
talked  about,  is  possible  only  through  universal  mediocrity  or 
a  spirit  of  self-sacrifice  on  the  part  of  the  more  able  members 
of  society  far  greater  than  has  ever  been  displayed  in  this  era. 
In  this  last  respect  we  are  somewhat  behind  some  civilizations 
that  have  preceded  us.  Society  has,  in  general,  always  had  to 
pay  for  services  rendered  in  proportion  to  their  value  and  it  is 
difficult  to  conceive  of  the  efficient  operation  of  the  present  in- 
dustrial methods  on  the  ground  of  common  ownership  without 
such  differences  in  compensation  as  will  most  naturally  tend  to 
perpetuate  the  social  differences  that  we  now  complain  of. 

True,  many  governments  are  now  operating  very  success- 
fully several  lines  of  national  utilities,  such  as  railways  and 
post-office  systems;  but  even  here  these  differences  in  com- 
pensation exist.  There  is  a  vast  difference,  however,  between 
governmental  ownership  of  a  limited  number  of  state-wide  or 
1  See  Industrial  History  of  England,  H.  deB.  Gibbins. 


64     PRINCIPLES   OF   INDUSTRIAL   ORGANIZATION 

national  utilities  and  governmental  ownership  of  all  tools  of  pro- 
duction. 

Nevertheless  these  socializing  doctrines  have  had,  and  will 
continue  to  have,  a  profound  influence  on  our  ideas  of  owner- 
ship. They  have  already  resulted  in  governmental  regulation 
that  would  have  been  considered  impossible1  a  few  years  ago 
and,  if  then  possible,  they  would  have  been  considered  an  in- 
fringement of  personal  liberty.  No 'one,  whether  interested  in 
industry  as  an  owner  or  as  an  employee,  can  afford  not  to  study 
these  tendencies  carefully.  They  come  as  a  direct  protest 
against  the  social  differences  resulting  from  the  absolute  separa- 
tion of  the  worker  from  the  tools  of  production  and  are  an  effort 
to  restore  that  lost  ownership.  Governmental  regulation  is 
even  now  with  us;  how  far  we  may  go  in  governmental  owner- 
ship is  a  problem  not  of  the  next  century,  but  of  tomorrow. 

REFERENCE  : 

The  Modern  Corporation,  by  Thomas  Conyngton. 

1  Note,  for  instance,  the  legal  regulation  of  the  price  of  upper  Pullman 
berths. 


CHAPTER  VII. 

PRINCIPLES   OF   ORGANIZATION  —  SYSTEM. 

40.  General  Principles.  The  great  advances  in  the  mechan- 
ical features  of  manufacturing  have,  necessarily,  had  their  coun- 
terpart on  the  administrative  side.  As  enterprises  have  grown 
in  size  the  simple  personal  methods  of  conducting  the  business 
of  the  factory  and  controlling  men  have  become  inadequate 
and  have  been  replaced  by  methods  less  personal.  The  man- 
agement of  a  large  industrial  enterprise  is  no  longer  the  work 
of  a  boss,  for  though  personality  is  still  a  great  factor  in  man- 
agement; to  be  successful  it  must  be  reinforced  by  a  knowledge 
of  many  things  unknown  to,-  and  not  needed  by,  the  old-time 
superintendent. 

[  All  branches  of  human  activity  have  risen  above  the  stage  of 
empiricism  and  rule  of  thumb  only  as  they  have  been  able  to 
build  upon  the  accumulated  facts  of  experience  and  accurate 
conclusions  drawn  therefrom.  Industrial  organization  and 
management  is  no  exception  to  this  rule.  Until  quite  recently 
industrial  management  has  been  largely  personal  and  empirical, 
rule  of  thumb  methods  being  almost  universally  used  in  all 
matters.  The  need  of  more  accurate  information,  especially 
in  administering  large  enterprises,  has  led,  however,  to  a  more 
careful  examination  of  the  art  of  management  with  a  view  of 
finding  whether  any  basic  principles  existed  that  might  serve 
as  a  safer  guide  than  the  cruder  empirical  methods;  and  with 
the  hope  that  a  better  understanding  and  more  accurate  solu- 
tion of  these  problems  would  come  with  a  fuller  understanding 
of  these  basic  laws. 

Such  basic  laws  do  exist;  and  the  term  industrial  engineer 
is  becoming  synonomous  with  one  skilled  in  factory  organiza- 
tion, who  endeavors  to  rest  his  conclusions,  not  on  simple  em- 
pirical information  or  judgment,  but,  as  far  as  possible,  upon 

65 


66     PRINCIPLES   OF   INDUSTRIAL   ORGANIZATION 

basic  observed  facts.  The  scientific  method  that  first  observes 
and  records  the  data  of  the  phenomena  concerned,  then  deduces 
the  fundamental  laws  of  the  phenomena  from  these  data,  and 
lastly  applies  these  deductions  to  predict  other  results  has  come 
to  stay  in  all  lines  of  human  activity.  Just  as  the  designing 
engineer  endeavors  to  obtain  highest  efficiency  by  eliminating 
energy  losses,  so  the  industrial  engineer  is  a  close  student  of 
wastes  in  manufacturing  processes.  Just  as  the  designing  en- 
gineer seeks  to  rest  his  work  on  accurate  data  and  scientific 
facts,  so  the  industrial  engineer  seeks  to  observe,  record  and 
formulate  the  data  of  industrial  operations  and  industrial  man- 
agement in  order  that  he  may  accurately  predict  the  results  of 
other  operations  and  arrangements.  His  field  is  indeed  a  wide 
one,  ranging  from  the  collection  of  statistical  data  of  the  in- 
dustry as  a  whole,  down  to  the  shipping  of  the  factory  product, 
and  his  sources  of  knowledge  have  their  roots  in  engineering, 
economics,  psychology  and  other  fields  of  human  experience. 
These  relations  and  conditions  apply,  in  general,  to  all  forms  of 
industry,  but  apply  with  special  force  to  industries  involving 
congregated  labor,  as  found  in  manufacturing  plants,  and  a  dis- 
cussion of  the  special  problems  found  in  organized  manufactur- 
ing will  exemplify  those  of  almost  any  other  form  of  industry. 
These  general  principles  apply  also  to  all  phases  of  manufac- 
turing industry,  including  construction,  equipment  and  opera- 
tion. 

More  than  ever,  perhaps,  the  successful  manager  must  be  a 
close  student  of  men  and  their  psychological  processes.  With 
the  steady  rise  in  intelligence,  the  increasing  complexity  of  per- 
sonal relations  and  the  growing  tendency  of  the  public  to  interest 
themselves  in  industrial  matters,  the  human  element  in  factory 
management  looms  up  with  increasing  importance;  and  no 
system  of  management  can  be  successful  that  does  not  take  this 
factor  into  account.  Just  how  far  such  human  relations  can  be 
said  to  be  open  to  scientific  methods  remains  to  be  seen,  though 
there  is  no  lack,  even  now,  of  those  who  claim  that  these  also 
can  be  measured  and  recorded. 

The  application  of   these   well-known  scientific  methods  to 


PRINCIPLES  OF  ORGANIZATION  —  SYSTEM      67 

industrial  organization  and  management  has  become  known  as 
efficiency  engineering,  industrial  engineering  or  scientific  man- 
agement. The  last  title  has  been,  perhaps,  not  well  chosen  and 
has  created  some  antagonism  to  the  use  of  these  principles, 
partly  because  of  a  lack  of  knowledge  regarding  the  basic  facts  and 
partly  because  of  a  well-grounded  fear  that  there  is  grave  danger 
in  extending,  to  the  extreme,  some  of  the  methods  advocated. 
Whatever  name  may  be  applied  to  this  work  it  is  certain  that 
the  scientific  method  of  attacking  the  problems  of  organization 
is  correct,  and  that  it  points  out  the  method  of  intelligently 
directing  the  construction  and  arrangement  of  factory  buildv. 
ings,  the  character  of  methods  and  processes,  the  organizations 
of  departments,  the  elimination  of  wastes  and  the  increase  of 
efficiency  in  all  phases  of  industrial  administration  where  data 
and  experience  are  applicable. 

Now  it  has  been  shown  that  the  following  important  prin- 
ciples underlie  the  economic  production  of  manufactured  goods: 

(a)  Division  of  labor,  including  separation  of  mental  and 
manual  labor. 

(6)  Transfer  of  skill. 

(c)  Transfer  of  thought. 

It  has  also  been  shown  that  these  methods  are  more  effective 
as  the  quantity  to  be  made  increases,  specialization  and  stand- 
ardization also  being  dependent  on  aggregation  or  quantity. 

It  may  be  stated,  therefore,  that 

(d)  The  unit  cost,  in  general,  decreases  as  the  quantity  in- 
creases. 

It  is  evident,  also,  that  as  enterprises  increase  in  size,  as  di- 
vision of  labor  is  more  fully  applied  and  departments  multiply, 
increasing  care  must  be  used  to  coordinate  the  work  of  men  and 
departments;  hence,  it  may  also  be  stated  that 

(e)  The  need  of  coordinative  influences  increases  with  ag- 
gregation and  division  of  labor. 

And,  lastly,  it  is  obvious  that  any  principle  gains  in  effec- 
tiveness if  applied  systematically  on  the  basis  of  recorded  expe- 
rience rather  than  empirically.  The  above-named  principles 
will,  therefore,  gain  in  value  if  applied  in  connection  with 


68     PRINCIPLES   OF   INDUSTRIAL   ORGANIZATION 

(/)  The  systematic  use  of  recorded  experience. 

Aside  from  the  human  factors  involved  these  may  be  taken  as 
the  most  important  principles  in  manufacturing  production. 
The  succeeding  chapters,  with  the  exception  of  the  last,  are  de- 
voted to  their  application  to  the  problems  of  organization,  and 
the  problems  of  some  of  the  most  important  departments  re- 
sulting therefrom  as  seen  in  present  day  practice.  In  the  last 
chapter  the  limitations  of  these  principles  as  a  scientific  basis  of 
the  art  of  management  will  be  briefly  discussed. 

It  is  obvious  that  the  departmental  organization  of  a  plant 
will  depend  largely  upon  its  size  and  the  degree  to  which  it  is 
specialized.  Increased  size  naturally  brings  with  it  greater  sub- 
division of  labor  and  the  consequent  need  of  added  coordinative 
influences.  Under  the  older  and  simpler  systems  of  produc- 
tion, when  small  numbers  of  men  were  the  rule,  the  relations 
between  master  and  man  were  very  simple.  Each  man  was 
competent  to  perform  any  and  all  operations,  producing  per- 
haps the  entire  article  himself.  The  instructions,  few  and  sim- 
ple, were  given  verbally,  and  duplication  in  a  modern  sense  was 
unnecessary.  As  the  size  of  industries  has  grown,  as  specializa- 
tion and  division  of  labor  have  been  extended  and  as  special 
or  scientific  knowledge  has  become  more  and  more  necessary, 
these  simple  relations  have  been  forcibly  expanded  and  the 
concerted  labors  of  master  and  man  have  been  replaced  by  ad- 
ministrative, planning  and  constructive  departments,  to  properly 
coordinate  the  work  of  which  has  become  a  study  in  itself. 

The  tendency  toward  complexity  in  organization  due  to  in- 
creased size  is  not  so  great,  however,  as  that  due  to  the  character 
of  the  industry  and  the  degree  to  which  it  is  specialized.  Manu- 
facturing industries  are,  broadly  speaking,  of  two  general  classes, 
namely,  continuous  and  intermittent.  In  a  continuous  process 
the  material  goes  in  at  the  receiving  end  of  the  plant,  is  worked 
continuously  and  appears  at  the  shipping  room  as  finished  prod- 
uct. A  continuous  process  may  be  either  analytical  or  syn- 
thetical; that  is,  it  may  take  some  natural  product  and  separate 
it  into  component  parts  or  change  its  general  form;  as,  for  in- 
stance, the  industries  built  on  salt  products,  ore,  oil  and  sugar 


PRINCIPLES  OF  ORGANIZATION  — SYSTEM      69 

refineries,  saw-mills,  etc.  Or  they  may  take  a  few  natural  prod- 
ucts and  passing  them  through  fixed  processes  build  them  up 
into  some  other  form,  as  may  be  seen  in  paint  works  and  wall- 
paper factories.  In  general,  such  industries  deal  only  with  a 
few  raw  materials,  these  passing  in  at  one  end  of  the  factory 
and  flowing,  so  to  speak,  through  a  number  of  fixed  processes  and 
passing  out  at  the  other  end  in  the  form  of  a  limited  number  of 
finished  products  and  by-products.  The  organization  that  the 
personnel  of  such  a  plant  will  most  naturally  take  will  depend 
on  the  character  of  the  industry,  but  will,  in  general,  be  com- 
paratively simple. 

Intermittent  or  interrupted  industries,  on  the  other  hand,  may 
take  many  kinds  of  raw  material,  carry  them  to  any  desired 
stage  of  completion,  store  the  finished  or  semi-finished  parts  when 
necessary  and  assemble  the  various  kinds  of  finished  product  as 
the  market  requires.  This  finished  product  may  cover  a  wide 
range  both  as  to  relative  size  and  character.  Ship-building 
plants,  agricultural  implement  works  and  plants  manufacturing 
electrical  machinery  are  excellent  examples  of  interrupted  in- 
dustries which  form  by  far  the  larger  part  of  organized  industry. 
The  above  classification  is,  of  course,  not  clearly  defined;  in 
fact,  these  types  of  industry  represent  extreme  cases  rather  than 
distinct  classes.  The  natural  tendency  toward  specialization 
constantly  tends  to  limit  the  range  of  intermittent  processes  and 
this,  in  an  extreme  case,  might  reduce  a  factory  of  the  inter- 
mittent type  to  one  of  the  continuous  type.  Many  factories, 
indeed,  have  both  continuous  and  interrupted  processes  in  op- 
eration at  the  same  time.  Plants  of  this  kind  tend  naturally 
to  divide  into  departments  and  are  naturally  more  complex  in 
character  than  those  of  the  continuous  type. 

Aside  from  these  considerations,  the  exact  form  of  organiza- 
tion of  any  plant  nearly  always  depends,  to  some  extent,  on  the 
character  and  ability  of  the  men  available.  Able  men  are  always 
rare  and  the  exact  subdivision  of  authority  and  responsibility 
often  depends  on  this  factor  rather  than  on  a  more  logical  basis 
of  an  abstract  analysis  of  the  problem.  For  this  reason  and 
the  other  reasons  advanced  above,  it  is  not  possible  to  formulate 


70     PRINCIPLES   OF   INDUSTRIAL   ORGANIZATION 

fixed  rules  for  planning  industrial  organizations.  There  are, 
however,  certain  general  principles  that  long  experience  has 
shown  to  apply  to  all  forms  of  organization  and  that  are,  there- 
fore, worthy  of  note. 

41.  Military  or  Line  Organization.  It  is  obvious  that,  where 
the  efforts  of  large  bodies  of  people  are  to  be  directed,  discipline 
is  an  essential  feature  of  the  plan  of  organization  whatever  it 
may  be.  The  oldest  and  most  natural  form  of  organization, 


6666666656666666 

Workmen  Workmen  Workmen  Workmen 

FIG.  2.  —  MILITARY  OB  LINE  ORGANIZATION 

therefore,  is  that  which  is  usually  called  military  or  line  organi- 
zation, so-called  because  it  was  the  essential  feature  of  military 
systems.  As  used  at  present  the  name  is  a  misnomer  as  mili- 
tary systems  have  been  subjected  to  the  same  modifying  in- 
fluences that  have  affected  industrial  and  other  organizations. 

Under  this  system  the  lines  of  direction  and  instruction  are 
vertical,  so  to  speak,  and  the  growth  of  such  an  organization 
may  be  illustrated  by  Fig.  2.  Here  as  the  duties  and  respon- 
sibilities of  the  general  manager  grew  beyond  his  physical  and 
mental  capacity  he  deputized  certain  of  his  duties  to  his  super- 
intendent. The  latter,  in  turn,  as  he  became  overburdened, 


PRINCIPLES  OF  ORGANIZATION —  SYSTEM      71 

engaged  foremen  to  assist  him  and  to  administer  the  several 
departments,  the  workman  being  held  responsible  only  ,to  the 
foreman  immediately  above  him.  The  lines  of  authority  and 
instruction  run  directly  down  from  manager  to  workman  and 
all  men  on  the  same  authoritative  level  are  entirely  independent 
of  all  others  similarly  situated.  A  foreman  receives  neither 
instruction  nor  command  from  another  foreman  and  he  can  give 
the  same  only  to  those  directly  under  him.  The  duties  dele- 
gated by  the  manager  to  the  superintendent  and  from  the  su- 
perintendent to  the  foreman,  or  in  fact  by  anyone  to  another 
lower  down  are  of  the  same  general  character.  Thus  the  in- 
struction given  to  each  foreman  would  be  of  the  same  char- 
acter, but  pertaining  to  different  parts  of  the  work  or  different 
lines  of  product.  The  proportion  of  both  mental  and  manual 
labor  is  approximately  the  same  for  all  men  on  the  same  level 
and  such  separation  of  mental  and  manual  work  as  does  exist 
comes  from  the  natural  reservation  of  mental  work  pertaining 
to  administration  by  those  higher  in  authority  in  delegating  sur- 
plus duties  to  those  under  them.  That  is,  division  of  mental 
and  manual  processes  is,  here,  incidental  rather  than  the  result 
of  logical  study. 

The  advantage  of  this  form  of  organization,  so  far  as  discipline 
is  concerned,  is  manifest.  The  duties  and  responsibilities  of 
each  man  are  clearly  defined  and  no  misunderstanding  need 
arise  as  to  each  man's  sphere  of  activity.  It  has,  however, 
grave  limitations  and,  because  of  these,  pure  military  organiza- 
tion is  no  longer  found  in  undertakings  of  any  size  or  complexity. 
As  plants  grow  in  magnitude  this  system  tends  invariably  to  load 
up  a  few  men  to  the  breaking  point  with  a  variety  of  duties,  since 
the  number  of  executives  on  any  one  level  is  limited.  It  tends 
also,  therefore,  to  crude  methods,  since  few  men  can  do  several 
things  and  do  them  well,  particularly  if  these  duties  are  de- 
cidedly different  in  character.  Thus  if  the  superintendent  un- 
dertakes, as  he  formerly  did,  to  be  both  administrator  and  chief 
designer  he  is  not  likely  to  be  a  great  success  in  either  capacity, 
as  these  duties  call  for  characteristics  not  usually  combined  in 
one  man.  The  instructions  given  to  individual  workmen  re- 


72     PRINCIPLES   OF   INDUSTRIAL   ORGANIZATION 

garding  the  prosecution  of  the  work  are  necessarily  meager, 
especially  if  the  work  is  varied,  hence  reliance  must  be  placed, 
to  a  large  extent,  in  the  knowledge  and  skill  of  the  workman. 
And  lastly,  this  form  of  organization  tends  to  make  the  success 
of  the  undertaking  depend,  to  a  large  extent,  on  the  ability  of 
a  few  strong  men,  the  loss  of  any  one  of  whom  would  be  very 
severely  felt.  The  military  system  has,  therefore,  seldom  existed 
in  a  pure  form  even  in  military  organizations,  except  where 
the  number  of  men  involved  was  small  and  the  scope  of  the 
scientific  basis  of  the  undertaking  narrow,  as  is  sometimes  the 
case  in  simple  continuous  processes. 

42.  Staff  Organization.  Suppose,  however,  that  as  the  busi- 
ness grew  there  came,  also,  an  increasing  need  for  expert  advice 
along  the  lines,  for  instance,  of  engineering  and  chemistry.  And 
suppose  the  general  manager  instead  of  trying  to  supply  this 
information  with  the  aid  of  his  superintendent,  divided  the 
mental  and  manual  work  and  deputized  it  in  the  manner  indi- 
cated in  Fig.  3,  a  chemist  being  engaged  to  give  expert  advice 
in  that  field,  an  engineer  doing  the  same  for  the  engineering 
required  and  the  superintendent  retaining  control  of  the  actual 
production.  Here  (Fig.  3)  the  engineer,  the  chemist  and  the 
manufacturing  superintendent  are  all  on  the  same  authoritative 
level,  no  one  being  above  the  other,  and  each  being  supreme  in 
his  own  department  except  as  he  is  responsible  to  the  general 
manager.  The  engineer  supplies  the  drawings  and  engineering 
knowledge,  the  chemist  supplies  the  expert  knowledge  for  cer- 
tain shop  processes  and  the  superintendent  of  production  con- 
trols the  actual  carrying  of  the  work  through  the  shop,  and  the 
hiring  and  disciplining  of  the  men,  etc.,  all  three  being  advisory 
to  the  general  manager.  Now,  each  foreman  receives  instruc- 
tion from  three  sources,  each  source  being  supreme  in  its  own 
field  of  effort .  Such  a  system  is  known  as  staff  or  functional 
organization. 

It  is  very  evident  that  the  foremen  in  Fig.  3  will  be  much  more 
intelligently  directed  than  those  in  Fig.  2,  particularly  so  as  the 
scientific  basis  on  which  the  industry  rests  becomes  greater  and 
more  complex.  Suppose,  now,  that  the  duties  of  each  foreman 


PRINCIPLES  OF  ORGANIZATION  — SYSTEM      73 

are  not  the  same  but  that  each  is  charged  only  with  the  super- 
vision of  certain  aspects  of  each  workman's  duties  and  that  the 
instruction  that  each  foreman  receives  from  the  three  primary 
sources  is  somewhat  different  from  his  fellow  foreman's  instruc- 
tions. Each  workman  will  then  be  guided  by  instructions  from 
four  separate  men  each  one  of  whom  will  give  him  expert  guidance 
in  some  phase  of  the  work  in  hand. 


Workmen 
FIG.  3.  —  FUNCTIONAL  OR  STAFF  ORGANIZATION. 

The  advantages  of  this  form  of  organization  are  manifest.  It 
conveys  expert  knowledge  and  guidance  to  each  workman 
through  experts,  and  not  through  foremen  partially  educated 
in  the  several  fields.  The  separation  of  mental  and  manual 
labor  is  planned  with  reference  to  the  functions  to  be  performed 
and  not  as  incidental  to  other  phases  of  administration.  It 
makes  provision  also  for  the  fullest  use  of  the  principle  of  divi- 
sion of  labor  by  keeping  the  functions  that  each  man  is  called 
upon  to  perform  down  to  a  minimum.  It  tends,  therefore,  to 
high  functional  efficiency  in  each  and  every  man. 

The  greatest  disadvantage  of  the  system  is  that  it  tends  to 


74     PRINCIPLES   OF   INDUSTRIAL   ORGANIZATION 

become  unstable  because  of  the  weakening  of  disciplinary  or 
line  control  unless  proper  means  of  coordinating  the  work  of  men 
and  departments  of  the  same  authoritative  level  is  provided. 
The  success  of  the  system,  when  carried  out  in  large  enterprises, 
rests  largely  on  the  ability  of  the  managing  authorities  to  cor- 
relate the  work  of  strong  personalities  and  have  them  work 
together  harmoniously.1  Since  the  separation  of  mental  and 
manual  work  is  a  fundamental  principle  in  this  type  of  organi- 
zation its  application  to  the  lower  grades  of  production  has  led 
to  considerable  criticism  on  the  ground  that  an  extreme  exten- 
sion of  the  principle  makes  automatons  of  the  lower  grades  of 
workers.  This  feature  will  be  discussed  elsewhere. 

43.  Line  and  Staff  Organization.     It  would  seem,  therefore, 
as  though  an  organization  to  be  most  effective  must  include  the 
good  features  of  both  of  these  important  principles.     Up  to  the 
present  there  has  been  no  lack  of  appreciation  of  line  organiza- 
tion, but  staff  organization  as  a  cardinal  principle  has  not,  until 
^recently,  received  the  attention  which  it  deserves  though  it  has 
V  been  used  unconsciously,  so  to  speak,  by  many  managers  for  a 
Jong  time  past.     The  work  and  writings  of  Mr.  F.  W.  Taylor,2 
in  particular,  have  done  much  to  call  attention  to,  and  awaken 
interest  in,  the  use  of  this  principle. 

The  organization  shown  in  Fig.  4  represents  fairly  well  the 
extent  to  which  these  two  principles  are  used  in  the  majority 
of  progressive  factories.  Here  the  primary  functional  divisions 
are  Sales,  Engineering,3  Manufacturing  and  Finance  and  the 
heads  of  these  departments  are  on  the  same  authoritative  level, 
no  one  being  above  another.  Each  one,  however,  has  a  certain 
amount  of  line  organization  under  him.  The  factory  superin- 
tendent receives  advice  and  instructions  from  the  chief  engineer 
and  treasurer  and  is  responsible  to  the  factory  manager  for  the 
general  conduct  of  the  factory. 

*  The  late  Walter  C.  Kerr  once  said,  "The  temperamental  question  is 
the  greatest  one  in  all  management." 

2  See  Shop  Management,  by  F.  W.  Taylor,  Trans.  A.S.M.E.,  June,  1903. 

3  Engineering,  strictly  speaking,  is  a  subdivision  of  manufacturing  so  that 
the  three  fundamental  divisions,  sales,  finance  and  manufacturing  are  repre- 
sented in  Fig.  4. 


PRINCIPLES  OF  ORGANIZATION —  SYSTEM      75 

Under  the  superintendent,  again,  are  functionalized  the  ship- 
ping clerk,  tool  designer,  order  department  and  inspection  de- 
partment. The  tool  designer  and  the  inspector  furnish  expert 
knowledge  and  advice  to  each  department  foreman,  and  the 


order  department  directs  all  matters  pertaining  to  actual  pro- 
duction. Combinations  of  line  and  staff  organization  down  to 
this  point  are  not  uncommon  but  the  adoption  of  full  staff  or- 
ganization (as  in  Fig.  3)  or  even  of  combined  staff  and  line 


76     PRINCIPLES   OF   INDUSTRIAL   ORGANIZATION 

organization  below  this  point  has  been  attempted  in  a  compara- 
tively few  instances.  The  tendency,  however,  is  in  the  direction 
of  extending  staff  organization  as  far  down  as  possible  and  this 
is  one  of  the  basic  principles  of  so-called  "  scientific  management." 
It  must  be  remembered  that  the  amount  of  subdivision  of 
labor  that  is  justifiable  depends  on  the  size  of  the  plant,  the 
character  of  the  industry,  and  the  personality  and  ability  of  the 
men  available  for  the  organization.  It  is  difficult  to  find  men 
exactly  suited  to  the  requirements  of  a  position  and  Fig.  4 
must,  therefore,  be  considered  as  an  average  or  approximate 
arrangement.  It  is  easier  to  adjust  the  scheme  of  organization 
than  to  change  personalities.  A  fuller  discussion  of  the  limita- 
tions of  these  principles  will  be  more  effective  after  examining 
some  of  the  problems  involved  in  actual  factory  administration. 

COORDINATION  AND  EXECUTIVE  CONTROL. 

44.  Coordination.  It  is  obvious  that  any  plan  of  organization 
to  be  highly  effective  must  be  definite;  that  is,  it  must  define 
clearly  every  man's  duties  and  coordinate  every  man's  efforts 
toward  the  desired  result.  The  duties  of  every  man  and  every 
department  should  be  outlined  as  clearly  as  possible  and  the 
authority  and  responsibility  of  every  man  definitely  fixed.  Au- 
thority and  responsibility  are  inseparable  and  are  essential  to 
effective  service.  It  is  not  good  policy  to  keep  men  in  uncer- 
tainty as  to  their  position  in  the  organization,  and  when  several 
men  are  on  the  same  authoritative  level  their  several  fields  should 
be  carefully  prescribed  and  their  efforts  carefully  coordinated. 
This  is  particularly  true  when  a  considerable  amount  of  staff 
organization  is  introduced,  since  this  tends,  naturally,  to  weaken 
the  disciplinary  effects  of  line  control;  and  where  staff  organi- 
zation is  used  to  any  marked  degree  special  care  must  be  used 
to  supply  coordinative  influences  to  compensate  for  this  weak- 
ness. 

While  a  certain  amciunt  of  coordination  can  be  accomplished 
by  means  of  personal  influence  it  is  obvious  that  where  large 
numbers  of  men  are  involved,  or  where  preplanning  of  the  work 


PRINCIPLES  OF  ORGANIZATION  — SYSTEM      77 

is  necessary,  written  documents  must  be  resorted  to.  For  in- 
stance, an  authoritative  diagram,  such  as  Fig.  4,  facilitates  a 
clear  understanding  of  the  relations  between  the  several  officers 
and  departments.  In  some  cases  the  detail  duties  and  author- 
ity of  men  and  departments  are  issued  in  written  form  and  copies 
of  these  instructions  are  bound  up  into  an  organization  record1 
that  serves  as  a  permanent  record  of  the  organization.  Whether 
such  a  volume  is  necessary  or  not  the  duties  of  men  and  depart- 
ments should  be  issued  in  writing,  and  necessary  adjustments 
between  men  made  by  some  one  higher  up  and  not  allowed  to 
remain  a  constant  source  of  irritation  and  dispute.  The  speci- 
fying of  the  duties  of  the  several  men  has  the  added  advantage 
of  compelling  the  organizer  to  think  out  his  plan  of  organization 
with  the  same  care  that  a  designer  of  a  machine  bestows  upon 
the  several  parts  to  insure  smooth  running. 

45.  Administrative  Charts.  It  is  important  that  the  orders 
and  reports  issuing  from  any  department  go  to  the  proper  persons 
and  to  them  only.  It  is  not  necessary  or  desirable  for  the 
general  manager  to  notify  every  shop  foreman  of  important 
details  of  the  business  and  it  is  even  less  desirable  that  reports 
showing  important  data  bearing  on  shop  costs,  for  instance, 
should  go  to  any  but  the  proper  authorities.  For  this  reason 
it  is  often  an  excellent  plan  to  lay  down  an  administrative  chart 
such  as  is  shown  in  Fig.  5.  The  diagram  shown  in  Fig.  4  is  very 
useful  in  showing  authoritative  relations,  but  an  analysis,  such 
as  Fig.  5,  showing  the  men  and  departments  that  are  to  have 
communication  with  each  other  is  more  useful  in  actual  opera- 
tion. -In  Fig.  5,  which  includes  the  same  men  and  departments 
as  Fig.  4,  the  men  or  sub-departments  that  are  attached  by  the 
military  system  to  each  department  are  arranged  concentrically 
around  each  department  head  for  the  sake  of  greater  clearness. 
In  some  cases  it  adds  to  the  clearness  of  the  diagram  by  locating 
the  several  departments  with  reference  to  their  geographical 
relation  to  each  other  and  it  then  serves,  also,  as  a  basis  for  a 
messenger  service  when  it  is  necessary  to  install  one.  The  char- 
acter of  the  information  which  is  to  pass  between  the  several 

1  See  Applied  Scientific  Management,  by  F.  A.  Parkhurst,  pp.  11  and  199. 


78     PRINCIPLES   OF  INDUSTRIAL   ORGANIZATION 


departments  can  be  worked  out  and  its  passage  indicated  by 
directive  lines  drawn  between  them.  Orders  may  be  indicated 
by  one  kind  of  line  and  reports  by  another. 


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I 


if 


46.  Orders  and  Returns.  It  is  evident  that  as  the  plant  grows 
in  size  and  organization  becomes  more  complex  the  manager 
loses  personal  touch  with  both  processes  and  men.  In  smaller 
shops  and  under  simpler  methods  the  manager  was  able  to 


PRINCIPLES  OF  ORGANIZATION  — SYSTEM      79 

assure  himself  personally  of  all  the  details  of  the  business,  to  know 
each  man's  abilities  and  hence  to  use  them  to  the  best  advantage, 
retaining  his  interest  in  the  work  on  personal  grounds.  He 
could  settle  all  disputes  and  differences  personally  and  the  man- 
ager's personality  played  a  large  part  in  the  administration  of 
the  works.  This  personal  method  of  giving  orders  and  checking 
up  results  is,  evidently,  no  longer  possible  with  modern  organi- 
zations, even  where  small  numbers  of  employees  are  concerned. 
As  the  numbers  grow  large  the  problem  increases  in  complexity 
and  must  be  solved  by  a  carefully  arranged  system  of  written 
communications.  It  is  a  cardinal  principle  in  modern  manage- 
ment that  all  directions  and  instructions  and  all  reports  and 
returns  must  be  in  written  form  of  some  kind.  This  gives  defi- 
niteness  to  all  such  matters  and,  through  duplicate  copies,  records 
of  all  transactions  can  be  preserved.  It  also  enables  the  man- 
ager, or  others  interested,  to  trace  faults  and  errors  and  place 
the  responsibility  where  it  rightly  belongs. 

There  are,  in  general,  only  two  classes  of  such  documents, 
namely,  orders  and  returns.  Under  orders  may  be  classified 
all  instructions  and  directions  issuing  from  the  several  depart- 
ments charged  with  directing  the  work,  making  purchases,  etc.; 
and  under  returns  may  be  included  documents  and  reports 
recording  the  results  of  operations,  accounts  of  materials,  time, 
supplies  and  other  data;  or,  more  briefly,  orders  direct  how  work 
shall  be  done;  returns  record  how  it  has  been  performed.  For 
convenience  and  dispatch,  orders  and  returns  are  usually  made 
on  printed  forms  so  that  the  amount  of  information  that  must 
be  filled  in  by  hand  is  a  minimum.  These  orders  and  returns 
move  to  and  fro  along  the  pre-arranged  lines  of  communication 
of  Fig.  5  and  if  the  system  is  adequate  each  department  is 
fully  informed  regarding  what  it  should  know;  confidential  in- 
formation goes  only  to  those  for  whom  it  is  intended,  and  the 
results  obtained  are  much  more  accurate  than  can  be  obtained 
by  any  personal  direction. 

The  relative  size  and  the  character  of  the  printed  form  on 
which  orders  may  be  written  will,  of  course,  depend  on  the  char- 
acter of  the  work  and  form  of  organization.  It  is  of  little  use 


80     PRINCIPLES   OF   INDUSTRIAL   ORGANIZATION 

to  try  to  indicate,  even  briefly,  their  general  character  as  they 
grow  out  of  the  needs  of  the  business.1 

Fig.  6  shows  a  typical  production  order  issued  by  the  pro- 
duction clerk  directing  a  department  to  perform  certain  work. 
The  written  order  enables  the  manager  and  the  several  heads 
of  departments  charged  with  the  direction  of  the  work  to  issue 
their  directions  with  a  clearness,  accuracy  and  surety  that 
cannot  be  approached  by  verbal  methods.  This  is  very  well 
illustrated  in  the  work  of  the  engineering  department.  The 


Pattern  or  Par.t  No.   To  Dept.    Date  of  Order  Requisition            Specification  No. 

Drawing  No.» 

Prod.0rder  No. 

Vlease  execute  the  following  order,  returning  this  slip  on  completion  of  work  to  Stockketper.     Order  to  be  completed  by 
Charge  all  labor  and  material  to  tbe  above  Production  Order  No.  and  Pattern  or  Part  No. 
Parts  jirefixed  bj  Dept.Letter  are  uot  in  btock  and  will  be  made  bj  that  Dept.  on  above  Prod.  Order  No.  and  delivered  to  Dept. 
and  by  scheduled  date  aa  shown. 

Description  of  Order 

Deliver  to  Dept. 

Quantity  and  Dcuciiption  of  Material  to  be  used.   Date  required  in  shop 

Date 

Dept. 

Date  order  completed 

Approved 

FIG.  6.  —  PRODUCTION  ORDER. 

drawings  and  specifications  issuing  therefrom  can  be,  and  should 
be,  so  made  as  to  make  verbal  communication  almost  entirely 
unnecessary. 

The  returns  from  factory  operations  and  transactions  are 
of  a  necessity  numerous  and  of  many  kinds.  Detail  records  of 
all  time  expended,  material  used,  supplies  ordered,  progress  of 
work,  etc.,  are  usually  obtained  by  a  carefully  arranged  system 
of  cards  which  are  filled  out  at  the  place  of  operation  and  then 

1  See  Factory  Organization  and  Costs,  by  L.  E.  Nicholson;  Commercial 
Organization  of  Factories,  by  J.  S.  Lewis;  Factory  Costs,  by  F.  E.  Webner, 
and  similar  books  for  typical  forms  of  orders  and  reports. 


PRINCIPLES  OF  ORGANIZATION —  SYSTEM      81 

returned  to  the  department  interested.     Thus  the  engineering 
data  and  the  records  of  tests  made  on  the  product  would  go  to 


> 

: 

_j 

A/EEK  E 

$0. 

fame 

NDiiNir; 

^ 

a 

MORNING 

AFTERNOON 

TOTAL 

IN 

OUT 

IN 

OUT 

IN 

OUT 

SUN. 

MON. 

TUE. 

WED. 

THU. 

FBI. 

SAT. 

J( 
PI 
D/ 
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3TAL                                               HRfi 

Fr.F                                                  HRR 

- 

P1FC.F 

kY                                                      HRR. 

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ITF                                         P 

ER  HR.._ 

TOTAL 

. 

FIG.  7.  —  TIME  CLOCK  CARD. 


the    engineering    department    for    its    information.     Inventory 
records  of  the  stores  department  might  go  to  the  superintendent 


82     PRINCIPLES   OF   INDUSTRIAL   ORGANIZATION 

(Fig.  4)  or  to  the  order  department.  All  cards  recording  time 
and  material  used  or  indicating  progress  of  work  would  be  re- 
turned to  the  cost  department.  Fig.  7  illustrates  a  typical  time 
card  on  which  the  time  of  entering  and  the  time  of  leaving  the  fac- 
tory may  be  filled  in  on  a  time  recorder,  while  Fig.  8  shows  a  work 
card  giving  in  detail  the  time  expended  on  a  certain  piece  of  work. 

These  detail  returns  are,  or  at  least  should  be,  used  for  three 
purposes. 

(a)  To  record  the  results  of  operations. 

(6)  To  predict  future  operations. 

(c)  To  serve  as  the  basis  of  managerial  reports. 


1  Sort  iron 

DAY  WORKER'S     DAILY  TIME  CARD 

Press  core 
Build 
Clean  It  dip 
Assemble 

Man  No.           Dept.  T.A.                                 Date                      Order  No. 
Transformer  Assembly 

9  Cable  &  tape 
10  Insulate  tank 

12  Felt  covers 

Dwg.  or  Spec.  No.           Pattern  or  Part  No.          Pieces          O.T.          Hours        Rate  pr.  hr.   II       Value 

14  Sfmp  name  p's 
15  P't  on  came  p's 

1 

1C  Drill  &  tap 

Type,  Class  and  Description  of  Part  and  Work  Done 

6         M         1         %         ~B         %          9          H         10         %         11         ii         12    1          H         2         y2 

3V$4H5M6^?           MS^OMlO 

Approved 

ORIGINAL                       Poreman 

FIG.  8.  —  WORK  CARD. 

Thus  the  engineering  data  from  the  test  floor  serves  not  only 
to  verify  the  accuracy  of  the  design  but  furnishes  information 
for  future  designs.  The  time  and  material  cards  returned  to 
the  cost  department  furnish  data  for  finding  the  cost  of  the 
product  and  also  for  predicting  future  costs.  These  features 
will  be  more  fully  discussed  in  succeeding  chapters. 

These  first  two  functions  of  the  factory  returns  enable  the 
several  departments  to  do  their  work  properly  and  to  keep 
track  of  all  that  occurs  in  which  they  are  severally  interested. 


PRINCIPLES  OF  ORGANIZATION —  SYSTEM      83 

It  is  difficult,  however,  for  the  manager  to  obtain  from  depart- 
mental records  a  clear  idea  of  what  is  occurring  unless  these 
records  are  presented  to  him  in  the  condensed  form  of  analyzed 
reports.  The  written  report  replaces  the  old-time  manager's 
personal  observations  with  accurate  statistics,  and  is  practically 
the  only  way  a  manager  can  accurately  gauge  the  operation  of 
a  large  factory  and  keep  a  firm  grasp  upon  it. 

The  character  of  the  reports  that  a  manager  may  require 
depends,  of  course,  on  the  nature  of  the  industry  and  the  form 
of  organization,  and  it  is  not  easy,  always,  to  select  the  reports 
that  will  be  of  most  value.  Unless  reports  are  of  use,  unless 
they  tell  something  bearing  on  the  cost  of  production  or  similar 
important  features  they  should  be  discontinued,  as  they  are  a 
source  of  waste.  Conversely,  unless  a  useful  report  is  used, 
unless  it  is  the  basis  of  analysis  or  discussion  which  throws  light 
on  the  problems  of  the  business,  the  data  which  it  presents 
might  as  well  go  into  the  waste  basket.  There  are  certain 
reports,  that  will  be  discussed  for  the  purpose  of  illustration, 
which  are  applicable  to  nearly  all  manufacturing  enterprises. 
In  Fig.  4,  for  instance,  the  president  would  call  upon  each  vice- 
president  for  certain  reports  from  each  primary  department 
thus  furnishing  him  with  sales,  engineering,  manufacturing  and 
financial  reports.  These  are  typical  classes  of  reports  though 
it  may  be  desirable  to  have  several  reports  from  each  depart- 
ment on  different  phases  of  its  work. 

The  most  important  perhaps  of  all  the  reports  is  the  profit 
and  loss  statement  which  is  usually  made  up  monthly  by  the 
accounting  department  and  hence  is  a  financial  report.  This 
report  is  a  summarized  statement  of  all  debits  and  credits,  clas- 
sified so  that  the  sources  of  profit  or  loss  can  be  easily  located. 
The  report  should  show  on  the  debit  side  all  such  items  as: 

(a)  The  factory  cost,  by  classes,  of  all  goods  shipped. 

(6)  The  cost  of  delivery  of  product,  including  freight  cartage, 
etc. 

(c)  The  selling  expense  carefully  classified. 

(d)  The  office  and  general  expenses  classified  and  distributed 
against  each  branch  as  far  as  possible. 


84     PRINCIPLES   OF   INDUSTRIAL   ORGANIZATION 

(e)  All  other  general  expenses,  such  as  advertising,  insurance, 
postage,  etc. 

It  should  show  on  the  credit  side : 

(a)  The  selling  price  of  all  goods  billed. 

(6)  Other  miscellaneous  receipts,  such  as  rent  and  interest 
from  outside  investments. 

The  summarized  difference  of  the  debit  and  credit  sides  shows 
whether  the  factory  is  running  at  a  loss  or  gain.  The  importance 
of  the  profit  and  loss  statement  to  the  manager  hardly  needs 
comment.  If  properly  arranged  it  is  an  invaluable  index  of 
weakness  or  strength  and  from  it  he  should  be  able  to  tell  just 
what  must  be  done  to  better  conditions  whether  that  be  an  in- 
crease on  sales  or  a  decrease  in  manufacturing  costs. 

The  returns  that  flow  into  the  cost  department  and  other 
departments  under  the  factory  manager  may  be  the  basis  of 
many  reports;  and  here,  again,  discretion  must  be  used  in  se- 
lecting those  that  will  be  most  useful.  Only  a  few  important 
ones  will  be  noted.  The  weekly  labor  report,  as  illustrated  in 
Fig.  9,  is  a  classified  statement  of  all  expenditures  for  labor.  It 
enables  the  manager  to  see  at  a  glance  where  the  money  paid  in 
salaries  has  gone  and  to  check  excessive  expenditures.  Some- 
times a  statement  is  made  in  this  report  of  the  total  amount  of 
money  expended  for  material  and  supplies  as  well  as  a  statement 
of  the  value  of  shipments.  This  widens  the  scope  of  the  report 
and  adds  to  its  usefulness.  The  special  cost  report  is  a  detailed 
statement  of  the  labor,  material  and  other  expense  items  which 
go  to  make  up  the  cost  of  a  particular  piece  of  apparatus.  It  is 
usually  compiled  for  the  purpose  of  making  a  study  of  such  a 
piece  of  apparatus  with  a  view  of  cutting  down  the  manufac- 
turing expense. 

A  most  useful  report  is  the  progress  report.  This  may  be 
compiled  by  the  order  department,  if  it  is  charged  with  the  duty 
of  moving  the  work  through  the  factory,  or  it  may  be  a  composite 
report  made  up  from  the  records  or  statements  of  the  several 
foremen.  It  is  of  particular  value  in  finding  out  what  contracts 
and  orders  are  behind  schedule  time  and  why  this  is  so.  It  also 
furnishes'  an  accurate  statement  of  the  volume  of  unfinished 
work  in  the  shop. 


PRINCIPLES   OF   ORGANIZATION —SYSTEM       85 


LABOR    REPORT. 

STANDARD  MANUFACTURING  CO. 
Week  Ending..... 


A.  -Alternating  Dynamos  (Complete  Machines  onlj). 
"•-Arc                       
C.  •  Direct  Current   .. 
'   E.^Miomc  Apparatus  ~.  7.             7.  

G.-  Stationary  and  Synchronous  Motors  (Complete  Machinee  only). 
[..  Cutouts  and  Switches.                                                                                                                      I       ' 
K...  Meters  and  Measuring  Instruments.                                                                           ~~            1      " 
M.  Transformers  and  parts  thereof. 
O.-  Miscellaneous  Supplies  of  our  own  manufacture. 
SUNDRY   PARTS  AS  FOLLOWS. 

Ql.  •  for  Alternating  Dynamosand  Motors. 

Q2.      ••     D.C. 

QX-     ..    Stationary  and  Synchronous     •• 

Q4.-     >•    Railway  Generators  and           " 

Q5.-    ..    Induction  Motors. 

KI.-  Arc  Lamps. 

R2.-   ..    Lamp,  Parts  and  Supplies. 

U.-  Induction  Motor*  (.Complete  Machines  onlj). 

«.-  Switchboards  (Complete). 

bcrap. 

TOTAL  DIRECT  LABOR. 

(Average  Rate  Per  Hour,  Direct  Labor).                                                        ) 

INDIRECT  LABOR. 

Salaries  Superintendence. 

Cos.  Dept. 

Time  Keeping. 

Factor,  Supfs  Clerk.. 

bhirping. 

Foremen    and  Inspectors. 

W.tcbrnen 

Engineers  and  Firemen. 

Oilerb  and  Sweepers. 

Helpers.  Laborers  and  MessengetB. 

Stock  and  Tool  Room  Employees. 

Toting  

Trucking,  Transportation,  Elerator  and  Crane  J.'en. 

Catemen 

••  Machiuerj  and  Tooli  (including  setticg  up  of  sarot). 

..   Patterns. 

••    Defective  Apparatus. 

••  Rolling  Stock  and  Uortes. 

Expense  Tools. 

Boxing  and  1'acking^time  consume^  in  packing  finished  apparatub  for  Etjj  Ujtn). 

Clerks  of  Kuremeo  and  Inspecturs. 

Receitiiig  Room  Employees. 

TOTAL   INDIRECT  LABOR. 

(Average  Rate  Per  Hour,  Indirect  l«lor).                                                       •) 

PROPERTY  AND  OPEN  ACCOUNTS. 

lUaj  Estate  and  liuildineg. 

Machinery  and  Tools. 

•  •        ..     Catalogued. 

<•         ..     Uncatalogued. 

•_.        ••    Special  Tools. 

•  •         >•    Pover  Plant  Equipment. 

Shop  Furniture  and  Futures  (including  Machinery  foundation). 

Office 

Experimental. 

Draughting  and  Deeignini;. 

Engineering  (  for  Factory.) 

Development. 

TOTAL  PROPERTY  AND  OPEN  ACCOUNTS. 

(  Average  Rote  Per  Hour.    Property  and  Open  Accounts).                                 ) 

Htrnaikp. 

D«t»                                                                                                Siened 

FIG.  9.  —  WEEKLY  LABOR  REPORT. 


86     PRINCIPLES   OF    INDUSTRIAL   ORGANIZATION 

s 

The  reports  from  the  sales  departments  would,  of  course, 
show  actual  sales  by  territories  and  a  corresponding  statement 
of  the  expenses  incurred  in  making  sales.  In  addition,  the 
thoughtful  salesman  can  greatly  aid  the  manager  by  reporting 
competitive  prices,  engineering  or  manufacturing  data;  in  fact, 
anything  that  will  keep  the  management  informed  of  what  is 
transpiring  in  the  salesman's  territory. 

Engineering  reports  are  usually  of  a  technical  character  and 
are  intended  to  keep  the  manager  informed  on  the  engineering 
features  of  the  business.  They  may  also  take  the  form  of  cir- 
culars of  information  to  salesmen. 

47.  Interpretation  of  Reports.  Statistical  statements  can 
often  be  made  much  more  effective  by  combining  or  contrasting 
them,  and  it  is  often  necessary  to  consider  data  from  different 
reports  to  obtain  best  results.  Thus  it  may  be  important  to 
know  the  value  of  the  output  for  a  given  period;  but  it  is,  in 
general,  much  more  important  to  know  the  output  per  unit  of 
capital  invested.  Again  the  amount  of  coal  consumed  in  the 
power  plant  per  month  might  be  of  interest,  but  the  coal  per 
kilowatt-hour  is  a  much  closer  check  on  the  efficiency  of  the 
power  plant.  All  statistical  data  gain  in  importance  by  com- 
parison. Thus  the  coal  per  kilowatt-hour  as  an  indication  of 
the  efficiency  of  the  power  house  gains  in  value  by  comparing 
it  with  the  record  of  preceding  months,  with  a  view  of  seeing 
how  near  it  approaches  the  best  record.  And  even  this  com- 
parison is  made  more  effective  and  searching  if,  at  the  same 
time,  account  is  taken  of  the  load  factor  month  by  month. 

Comparisons  of  this  sort  are  facilitated  by  expressing  the  data 
in  graphical  form  which  not  only  shows  more  clearly  the  rela- 
tive values  of  any  given  account,  from  date  to  date,  but  shows 
the  relative  values  of  different  sets  of  data,  as  well  as  indicating 
tendencies  much  more  clearly  than  can  be  done  by  tabulated 
figures.  Fig.  10  shows  a  few  curves  such  as  might  be  plotted 
from  the  records  of  a  plant  employing  about  1200  men  and  turn- 
ing out  $1250  worth  of  product  per  capita  per  annum  or  a  total 
of  $1,500,000  per  annum  at  factory  cost.  The  curves  shown 
are  hypothetical  and  do  not  represent  any  actual  case.  They 


PRINCIPLES   OF   ORGANIZATION  —  SYSTEM      87 


serve,  however,  to  show  the  general  character  of  such  curves. 
Other  curves,  of  course,  may  also  be  plotted  if  they  will  assist 
the  analysis.  Thus,  the  curves  of  material  used  might  be  of 
interest  and,  if  the  factory  was  developing  new  machinery,  the 


Jan.  Feb. 

3       10       17      24       31        7         14       21 


Mar. 
14       21 


April 
4        11       18 


May 
2        s 


I 

5  Shipments 


Tola 


Fact 


dire 


1  Co 


L-t  Labor 


t  Labor 


Weeks 

FIG.  10.  —  GRAPHIC  REPORTS. 


cost  of  experimental  work  would  certainly  be  an  important 
account.  If  the  product  were  diversified  it  might  be  desirable 
to  plot  separate  curves  for  the  several  lines  of  goods  manufac- 
tured, combining  their  totals  into  curve  number  3.  Curve  3 


88     PRINCIPLES   OF   INDUSTRIAL   ORGANIZATION 

represents  the  total  shop  cost  of  all  goods  manufactured  while 
curve  4  shows  the  total  cost  of  goods  including  all  general  and 
selling  expenses.  The  difference  between  curves  4  and  5  will 
be  the  probable  profit  for  the  week  considered,  but  does  not 
indicate  what  the  profits  will  be  on  the  particular  goods  shipped 
during  that  week.  Sometimes  it  is  useful  to  plot  the  average  l 
values  of  the  account  considered  and  again  it  may  be  helpful  to 
plot  the  accumulated  total  up  to  the  time  considered  depending 
on  the  business  and  the  information  needed.  The  principle  is 
of  very  wide  application  and  helpful  in  all  cases  where  large 
masses  of  detailed  returns  must  be  condensed  into  a  form  that 
will  indicate  general  tendencies  at  a  glance. 

THE  COMMITTEE  SYSTEM. 

48.  Committees  in  General.  Factory  problems  are  nearly 
always  many  sided  and  hence  difficult  of  solution  by  any  one 
man,  especially  where,  under  staff  organization,  he  is  charged 
with  and  capable  of  handling  only  one  phase  of  the  work.  Fur- 
thermore, as  before  stated,  when  several  men  are  on  the  same 
authoritative  level  there  must  always  be  some  definite  means 
provided  so  that  they  can  harmonize  their  efforts.  There  is  no 
way  by  which  these  ends  can  be  served  comparable  with  a  good 
committee  system.  There  are  several  inherent  advantages  in 
a  good  committee.  First  it  is  impersonal  in  its  action,  and  its 
verdict,  like  that  of  any  jury,  is  usually  based  on  the  facts  pre- 
sented. The  very  atmosphere  of  a  committee  tends  to  compel 
all  of  its  members  to  lay  aside  pettiness  and  personal  prejudice 
and  to  act  in  accordance  with  the  merits  of  the  case.  The  fore- 
man who  would,  over  the  telephone,  blame  a  fellow  foreman  for 
a  delay  will  hesitate  to  do  so  in  his  presence  or  in  that  of  his 
superior  officers.  The  decisions  of  a  committee  are,  therefore, 
likely  to  be  more  accurate  than  those  of  an  individual  because 
of  the  greater  accuracy  of  its  basic  information.  A  misstate- 
ment  on  the  part  of  a  member  is  not  likely  to  go  unchallenged. 

Secondly,  committee  meetings  tend  to  promote  a  better  un- 

1  For  a  more  extended  discussion,  see  Works  Management,  by  W.  D. 
Ennis,  p.  17. 


PRINCIPLES  OF  ORGANIZATION  — SYSTEM      89 

derstanding  between  men  of  the  same  authoritative  level  and 
of  different  levels.  Distrust  and  jealousy  of  each  other  are 
rapidly  eliminated  as  men  know  one  another  better  and  see  the 
good  side  of  each  other's  nature.  There  is  something  likeable 
in  all  men  if  one  can  succeed  in  discovering  it,  and  this  can  be 
done  only  by  bringing  them  into  close  personal  contact  with 
common  problems  to  be  solved,  not  by  wrangling  and  fault 
finding  but  by  an  earnest  endeavor  to  find  the  very  best  solu- 
tion. Thirdly,  the  committee  method  tends  to  awaken  interest 
in  the  work  and  to  draw  out  the  best  efforts  of  all  of  its  members, 
and  tends  generally  toward  a  better  esprit  de  cor  p. 

Committees  are  always  of  an  advisory  character.  They  can- 
not replace  strong  personality  but  they  can  be  used  effectively 
to  assist  a  strong  executive  in  finding  out  what  is  actually  going 
on  in  the  factory,  in  deciding  what  should  be  done,  and  in  enlist- 
ing the  good  will  of  those  under  him.  The  best  and  most  natural 
basis  of  committee  work  is  a  report  on  the  matter  under  dis- 
cussion, and  reports  are  greatly  enhanced  in  value  when  dis- 
cussed by  an  intelligent  and  representative  committee.  There 
may  be  many  kinds  of  committees  and  for  many  purposes,  but 
only  a  few  typical  ones  will  be  discussed  here.  In  general,  com- 
mittees should  not  be  too  large  or  too  small.  If  too  large  they 
become  very  unwieldly  and  if  too  small  they  may  not  secure  a 
broad  representation.  A  committee  of  six  members  is  usually 
large  enough. 

49.  The  Manufacturing  Committee.  Referring  to  Fig.  4  it 
is  apparent  that  no  one  of  the  four  vice-presidents  would  be  able, 
in  general,  to  advise  the  general  manager  on  the  entire  manu- 
facturing policy  of  the  works.  But  if  these  four  men  are  col- 
lected into  a  manufacturing  committee  each  of  the  four  important 
divisions  of  the  works  is  represented  by  an  expert.  The  general 
manager  would  be  the  natural  chairman  and  such  a  committee, 
through  him,  can  direct  the  manufacturing  policy  of  the  plant 
with  great  intelligence.  The  matters  that  naturally  come  before 
this  committee  are: 

(1)  The  general  manufacturing  policy  of  the  plant,  the  char- 
acter and  sizes  of  the  articles  to  be  made. 


90     PRINCIPLES   OF   INDUSTRIAL   ORGANIZATION 

(2)  The  approval  of  all  orders  of  extraordinary  character  and 
the  approval  of  orders  for  stock,  if  goods  are  manufactured  for 
stock.  The  approval  of  all  extraordinary  manufacturing  ex- 
penditures and  recommendations  for  economies. 

The  reports  that  would  naturally  be  laid  before  it  would, 
therefore,  include  the  profit  and  loss  statement,  stock  and  sales 
reports  and  similar  general  statements. 

50.  The  Tool  Committee.     The  tool  committee  (Fig.  4)  will 
usually  consist  of  the  tool  designer,  if  one  is  employed,  the  head 
toolmaker,  a  representative  of  the  superintendent's  office  and 
any  other  men  from  the  shop  or  elsewhere  who  may  be  of  serv- 
ice in  the  work  under  discussion.     This  committee  would  discuss 
all  problems  concerning  tools  for  new  work  or  improvements  in 
those  existing.    The  amount  of  money  that  it  is  desirable  to  spend 
on  tools  may  often  be  limited  by  the  manufacturing  committee, 
and  the  tool  committee  must,  therefore,  have  full  knowledge 
of  the  number  of  parts  to  be  manufactured  and  the  probability 
of  a  repetition  of  the  order.     A  tool  committee  can  save  or 
waste  a  lot  of  money,  and  which  of  these  they  succeed  in  doing 
will  depend  to  a  large  extent  on  how  closely  they  consider  the 
effect  of  the  number  of  parts  to  be  made  (See  Article  21). 

Where  it  is  desired  to  reduce  the  cost  of  manufacture  of  an 
existing  line  the  engineer  in  charge  of  that  line  should  sit  with 
the  committee.  The  combination  of  an  engineer,  a  toolmaker 
and  a  good  manufacturing  foreman  provides  a  powerful  method 
for  reducing  costs  so  far  as  tools  and  design  will  permit.  The 
special  cost  reports,  already  referred  to,  are  a  great  aid  to  such 
a  committee  when  discussing  cost  reduction.  This  committee 
can  also  be  of  great  help  to  the  engineering  department  in 
standardizing  product. 

51.  The  Shop  Conference.     The  shop  conference  is  usually 
composed  of  shop  foremen  or  similar  men  and  a  representative 
of  the  order  department,  with  the  superintendent  as  chairman. 
Before  this  committee  come  all  problems  and  questions  regard- 
ing work  in  progress,  in  fact,  its  minutes  are  sometimes  used  as 
a  progress  report.     If  a  progress  report  is  maintained  by  the 
order  department  it  naturally  forms  a  basis  of  discussion  for  the 


PRINCIPLES  OF   ORGANIZATION  — SYSTEM      91 

committee.  All  matters  pertaining  to  the  operation  of  the  shop 
may  very  profitably  be  discussed  by  this  most  important  com- 
mittee and  the  information  gathered  from  the  men  actually  in 
touch  with  the  work  is  of  great  importance,  since  it  will  cover  the 
whole  range  of  shop  operation,  including  labor  difficulties. 

52.  Other    Committees.      The    above    committees    consist, 
largely,  of  the  officers  of  the  company,  but  there  are  many  other 
forms  of  committees  that  may  well  include  some  of  the  humblest 
workmen  as,  for  instance,  the  complaint  committee  for  adjust- 
ing differences,  the  suggestion  committee  and  committees  on 
welfare  work.     The  principle  is  of  very  wide  application.     What- 
ever the  committee  may  be,  its  members  should  be  selected  with 
care,  its  function  should  be  definite  and  its  meetings  usually 
should  be  called  at  regular  stated  periods.   Careful  minutes  should 
be  kept  of  its  proceedings  and  careful  attention  should  be  given 
to  its  recommendations.     If  properly  organized  and  conducted 
there  is  no  other  method  that  can  compare  with  a  committee 
system  for  finding  out  what  is  needed  and  how  best  to  accom- 
plish the  needed  result.     As  a  means  of  strengthening  executive 
control  and  at  the  same  time  retaining  the  good  will  of  the  en- 
tire organization  it  is  invaluable.     Committees,  however,  like 
all  other  machinery  of  management,  must  be  used  with  dis- 
cretion and  intelligence.     Obviously,  the  number  and  character 
of  the  committees  necessary  or  desirable  will  depend  on  the  size 
and  character  of  the  business.     The  committee  system  that  will 
be  a  perfect  success  in  one  plant  may  be  useless  in  another;  and 
in  small  plants  a  committee  may  be  a  detriment  and  a  waste  of 
time. 

53.  Departmental   System.     The   foregoing   is   a  very   brief 
outline  of  the  more  important  features  of  the  systematic  control 
and  coordination  of  the  departments  of  a  factory.     Each  of 
these  departments,  again,  will  have  its  own  internal  system  of 
card  indexes,  filing  cases,  blank  forms,  etc.     In  the  succeeding 
chapters  some  of  the  detail  work  of  several  of  the  departments 
will  'be  discussed  in  so  far  as  it  bears  on  general  principles  of 
organization,  but  no  effort  will  be  made  to  discuss  departmental 
systems  in  detail  since,  obviously,  they  vary  so  widely  as  to 


92    PRINCIPLES   OF   INDUSTRIAL   ORGANIZATION 

make  this  of  doubtful  value,  especially  as  such  detail  is  of  pe- 
culiar interest  to  the  department  specialist  only.  For  such 
detail  the  student  is  referred  to  the  many  works  on  office  systems. 

REFERENCES  : 

Shop  Management,  by  F.  W.  Taylor,  Trans.  A.S.M.E.,  Vol.  24. 

Profit  Making  Management,  by  C.  U.  Carpenter. 

Modern  Organization,  by  C.  D.  Hine. 

Efficiency,  by  Harrington  Emerson. 

The  Twelve  Principles  of  Efficiency,  by  Harrington  Emerson. 


CHAPTER   VIII. 

PLANNING   DEPARTMENTS. 

54.  General  Principles.  The  separation  of  mental  and  manual 
processes,  and  the  application  of  the  principles  of  transfer  of 
skill  and  thought  carry  with  them  the  principle  of  preplanning 
of  the  work  concerned.  The  convenience  and  economy  of  plan- 
ning work  in  advance  are  obvious  and  need  no  discussion,  and 
the  application  of  the  principles  discussed  in  the  preceding  par- 
agraphs are  well  shown  in  the  operation  of  existing  planning 
departments,  such  as  the  engineering  department  and  the  tool 
room. 

Planning  of  work  may  be  done  in  one  of  two  ways,  namely, 
empirically  or  statistically.  Any  man  highly  experienced  in  a 
given  line  of  work  can  easily  plan  a  desirable  sequence  of  opera- 
tions for  a  given  piece  of  work  basing  his  predictions  on  his  ex- 
perience and  judgment,  but  there  will  be  definite  limitations 
to  the  accuracy  of  his  predictions.  For  instance,  if  there  are 
several  desirable  ways  of  performing  the  work  he  will  not,  in 
general,  be  able  to  say  which  is  the  best  way,  unless  he  or  some 
other  equally  competent  man  has  tried  them  all  and  recorded 
his  results.  Again,  he  may  be  able  to  assign  the  approximate 
time  necessary  to  perform  the  work,  or  the  tools  that  are  most 
efficient  for  the  purpose;  but,  in  general,  unless  he  possesses 
recorded  data  bearing  on  these  matters  his  empirical  estimates 
are  approximate  only,  and  his  predictions  useful  only  within 
the  range  of  his  experience.  Where  recorded  data  are  to  be 
had,  however,  the  basis  of  prediction  is  much  more  sound;  and 
if  such  data  form  a  record  of  high-grade  performances  they  are 
inestimably  superior  to  empirical  estimates.  The  engineering 
and  drafting  department  is  the  finest  example  of  the  separation 
of  mental  and  manual  processes  and  the  prediction  of  results 
on  the  basis  of  recorded  data.  True,  a  considerable  amount  of 

93 


94    PRINCIPLES   OF   INDUSTRIAL   ORGANIZATION 

the  work  of  this  department  is  still  empirical,  and  will  remain 
so  for  many  years;  yet  the  progress  that  has  been  made  is  re- 
markable and  foreshadows  what  may  be  expected  to  occur  in 
the  planning  of  manufacturing  operations  when  a  sufficient  vol- 
ume of  data  bearing  on  capacities  of  machines,  forms  of  cutting 
tools,  the  times  required  for  operations,  etc.,  have  been  collected. 

The  growth  of  the  planning  department  is  of  interest.  A  few 
years  ago  a  typical  organization  of  a  production1  department 
consisted  of  the  superintendent,  the  several  foremen  and  a  few 
special  officers,  such  as  a  stores-keeper  and  time-keeper.  The 
superintendent  received  the  formal  order  and  instructions  for 
the  work,  gave  it  a  number,  letter  or  some  other  distinguishing 
mark  and  sent  each  foreman  an  order  instructing  him  how  to 
proceed  with  his  part  of  the  work,  trusting  to  natural  coopera- 
tion among  the  foremen  to  keep  the  correct  sequence  of  opera- 
tions so  that  the  finished  product  would  be  shipped  in  time.  A 
record  was  kept  of  all  time  and  material  expended  on  the  job2 
and  the  total  cost  of  the  work  recorded,  though,  in  general,  detail 
costs  were  not  obtained. 

As  the  necessity  of  more  detailed  costs  became  greater,  and 
the  science  of  cost  keeping  grew,  the  instructions  or  production 
orders  (Fig.  6)  issued  to  the  foremen  were  made  more  and  more 
in  detail  for  each  job.  As  works  increased  in  size  it  became  in- 

1  Properly  speaking  the  production  department  embraces  all  men  and 
departments  that  have  to  do  with  actual  production,  as  distinguished  from 
the  other  general  divisions,  sales  and  finance.     Engineering  though  a  pro- 
ductive process  has  become  so  important  in  some  industries  that  it  is  often 
considered  as  an  independent  department,  and  the  name  production  depart- 
ment limited  to  that  portion  of  the  organization  that  is  controlled  by  the 
factory  manager  (Fig.  4).     The  name  is  sometimes  applied  to  the  factory  plan- 
ning department  but  this  use  of  the  term  does  not  seem  to  be  warranted. 
The  factory  planning  department  is  a  part  of  the  production  department. 

The  stock  room  and  shipping  department  strictly  speaking  are  not  pro- 
ductive departments  but  they  are  so  closely  identified  with  production  that 
they  are  often  included  in  the  production  department. 

A  distinction  should  be  made  between  stock  and  stores.  Stock  refers  to 
finished  parts  or  finished  machinery;  stores  to  raw  or  unworked  material. 

2  The  writer  does  not  feel  that  any  apology  for  the  use  of  this  term  is 
necessary.     True,    it  is  more  expressive  than  elegant,   but,  like  the  term 
"boss,"  there  is  no  other  word  that  can  be  used  to  take  its  place  fully. 


PLANNING  DEPARTMENTS  95 

creasingly  difficult  for  the  foreman,  and  others  charged  with  the 
production,  to  keep  the  proper  sequence  of  operations  on  a  mental 
and  verbal  basis;  and  when  one  considers  the  complexity  of  the 
modern  shop,  and  the  immense  number  of  small  parts  passing 
through  even  a  fair-sized  establishment,  the  performance  of  some 
of  these  superintendents  and  foremen  seems  marvelous  indeed. 
The  demand  for  a  more  systematic  method  of  carrying  the  work 
through  the  shop  gave  rise  to  the  second  function  of  the  plan- 
ning department,  namely,  that  of  scheduling  the  work  so  that 
a  better  and  more  definite  sequence  could  be  observed.  In  the 
beginning  this  scheduling  was  by  departments  only,  but  now, 
in  some  establishments,  each  and  every  operation  is  scheduled, 
the  machine,  and  sometimes  the  man  concerned  being  prede- 
termined. In  order  to  insure  the  carrying  out  of  a  prearranged 
program  of  work  a  tracing  system  naturally  grew  up  and  this 
forms  the  third  important  function  of  a  planning  department. 
Summarizing,  therefore,  the  fundamental  functions  of  a  planning 
department  are: 

(1)  Making  and  issuing  of  production  orders  in  proper  detail. 

(2)  Scheduling  the  work  so  as  to  secure  proper  sequence. 

(3)  Insuring  the  correct  sequence  by  tracing  progress  of  work. 

(4)  Collecting  such  records  of  performance  as  may  be  nec- 
essary. 

In  most  instances,  the  work  of  the  planning  department  is  con- 
fined to  the  first  function,  but  the  last  three  are  rapidly  becoming 
important  and  necessary  parts  of  productive  processes.  On  the 
other  hand  the  planning  department  may,  and  often  does,  in- 
clude other  functions.  A  recently  published  description  of  a 
plant  where  so-called  scientific  management  has  been  installed 
lists  the  following  men  as  under  the  planning  department - 
shop  engineer,  stores-keeper,  cost-clerk,  shipping-clerk,  receiving 
clerk  and  inspector,  as  well  as  several  others  directly  engaged  in 
planning.  In  a  small  concern  it  is  not  only  feasible  but  may  be 
good  management  to  include  all  these  activities  under  one  de- 
partment. It  is,  however,  contrary  to  the  elementary  prin- 
ciples of  division  of  labor,  which  assigns  as  few  duties  as  possible, 
either  to  a  man  or  a  department,  these  duties  being  of  a  similar 


96    PRINCIPLES  OF  INDUSTRIAL  ORGANIZATION 

character  as  far  as  possible.  The  function  of  the  planning  de- 
partment is  the  planning  and  scheduling  of  the  work,  and  as 
plants  increase  in  size  such  dissimilar  functions  as  some  of  those 
listed  above  naturally  tend  to  become  independent  departments 
functionalized  under  the  superintendent.  They  are  in  reality 
more  highly  specialized  functions  that  he  formerly  was  expected 
to  perform  himself,  and  the  manner  of  their  formation  will  de- 
pend, to  a  large  extent,  on  the  size  of  the  works  and  the  char- 
acter of  the  men  obtainable  for  the  several  positions.  Thus 
both  costs  and  rate  setting  might  very  well  be  included  in  the 
work  of  the  planning  department  and  not  be,  as  indicated  in 
Fig.  5,  directly  under  the  superintendent.  On  the  other  hand 
there  seems  to  be  no  good  reason  for  making  the  planning  de- 
partment an  independent  one  under  the  factory  manager  (if 
there  be  one),  thus  making  the  manager  of  the  planning  depart- 
ment a  thorn  in  the  side  of  the  superintendent  who  is  charged 
with  the  responsibility  of  production.  The  planning  depart- 
ment should  be  in  charge  of  the  superintendent  of  production, 
and  the  head  of  the  planning  department  should  be  of  the  char- 
acter of  an  assistant  superintendent.  When  organized  inde- 
pendently it  usually  results  in  much  duplicate  work  and  opens 
up  an  opportunity  for  inter-departmental  bickering. 

55.  Functional  Foremanship.  Many  existing  industrial  plants 
have  well-defined  planning  departments  performing  one  or  more 
of  the  four  fundamental  functions  noted  above.  Mr.  F.  W. 
Taylor1  has  very  ably  shown  that  the  work  of  planning  may  be 
very  greatly  extended  and  at  the  same  time  greater  advantage 
taken  of  the  principle  of  the  division  of  labor.  His  typical  or- 
ganization, which  is  outlined  below  is  particularly  adapted  to 
iron-working  establishments  machining  large  pieces,  but  the 
principles  involved  are  of  almost  universal  application.  Under 
Mr.  Taylor's  system  the  work  now  ordinarily  performed  by  the 

'!  See  "Shop  Management,"  by  F.  W.  Taylor,  Trans.  A.S.M.E.,  Vol.  24. 
This  classic  paper  should  be  read  by  everyone  interested  in  industrial  enter- 
prises. Whether  all  the  methods  advocated  by  Mr.  Taylor  are  desirable 
or  not  the  fact  remains  that  the  principles  advanced  will  increase  production 
if  intelligently  applied  and  the  paper  no  doubt  indicates  the  trend  of  industrial 
organization. 


PLANNING  DEPARTMENTS  97 

foreman  is  divided  into  several  parts  or  "functions  "  each  per- 
formed by  a  separate  "  functional  foreman "  or  "  functional 
boss"  as  he  styles  him.  Care  is  taken  to  separate  planning 
functions  from  executive  functions  and  all  planning  is  removed, 
as  far  as  possible,  from  the  shop  to  the  planning  department. 
The  latter  then  performs  for  the  constructive  side  of  the  industry 
what  the  engineering  department  has  long  performed  for  the 
designing  side  of  the  work.  In  fact,  the  movement  to  do  the 
planning  of  all  productive  processes  in  advance  and  in  a  separate 
department  is  analogous  to  the  movement  that  formed  the  en- 
gineering department.  It  is  in  strict  accord  with  the  general 
principles  of  division  of  labor  and  the  separation  of  mental  and 
manual  processes. 

In  his  work  at  the  Bethlehem  Steel  Company  Mr.  Taylor 
found  the  following  subdivision1  and  rearrangement  of  functions 
profitable:  — 

In  the  Planning  Department. 

(1)  The  Order-of-Work  or  Route  Clerk. 

(2)  The  Instruction-Card  Clerk. 

(3)  The  Time  and  Cost  Clerk. 

In  the  Shop. 

(4)  The  Gang  Boss. 

(5)  The  Speed  Boss. 

(6)  The  Inspector. 

(7)  The  Repair  Boss. 

And  for  the  Entire  Works. 

(8)  The  Shop  Disciplinarian. 

The  following  is  a  very  brief  statement  of  the  duties  of  these 
several  bosses  as  stated  by  Mr.  Taylor: 

The  order-of-work  or  route  clerk  lays  out  the  route  that  the 
piece  is  to  follow  through  the  several  shops  and  the  sequence  of 
machines  and  men  that  are  to  operate  upon  it  in  each  shop.  He 

1  Mr.  Taylor's  analysis  of  the  duties  of  the  average  foreman  and  his  use 
of  this  analysis  in  subdividing  the  foreman's  functions  is  a  masterpiece  that 
will  repay  reading.  See  A.S.M.E.,  Vol.  24. 


98     PRINCIPLES   OF   INDUSTRIAL   ORGANIZATION 

prepares  the  route  sheet  and  from  it  he,  or  his  assistant,  makes 
out  the  work  orders  for  each  man  or  machine  operating  upon  it. 
These  work  orders  usually  give  a  list  of  the  materials  required 
for  the  work  specified,  describe  the  work  to  be  done  and  indicate 
where  the  piece  is  to  be  sent  for  the  next  operation.  The  work 
order  is  the  production  order  of  Fig.  6  more  highly  developed. 
It  must  give  also  the  order  number  of  the  job,  the  number  of  the 
instruction  card  (to  be  described)  or  other  references  which  may 
be  needed  to  identify  it.  The  order-of-work  or  route  clerk  is 
responsible  for  the  sequence  of  work  in  the  shop,  though  in  some 
modified  applications  of  Mr.  Taylor's  system  both  a  route  clerk 
and  an  order-of-work  clerk  are  used,  the  first  laying  out  the  route 
schedule  and  the  second  seeing  to  its  operation  and  enforcement. 
This  division  would  naturally  come  about  in  a  large  plant,  but 
even  then  these  two  men  must  work  in  close  harmony. 

The  instruction-card  clerk  fills  out  the  instruction  card  (Fig. 
11)  which  bears  the  same  relation  to  the  planning  department 
that  a  drawing  does  to  the  drafting  room.  It  gives  all  the  in- 
formation regarding  the  necessary  drawings,  order  numbers, 
jigs,  fixtures,  etc.,  and  gives  the  exact  sequence  of  detail  opera- 
tions that  must  be  followed  by  each  workman.  It  may  give 
the  number  of  cuts,  the  depth  of  each  cut,  the  speeds  and  feeds 
and  the  time  each  cut  and  operation  should  take.  It  may  also 
give  full  information  regarding  the  piece  rate,  day  rate,  or  pre- 
mium on  which  the  work  is  to  be  performed.  In  certain  cases 
it  is  clear  that  it  might  include  the  information  listed  on  the 
work  card  just  described,  but  usually  it  is  more  convenient  to 
use  the  two  cards. 

The  time  and  cost  clerk  prepares  for  the  instruction  card  the 
necessary  instructions  to  the  workman  for  the  recording  of  time 
and  cost  of  all  work  and  for  securing  from  the  workman  the  proper 
returns  for  making  cost  and  time  records  (see  Article  46). 

The  gang  boss  makes  all  preparations  for  getting  the  work  to 
the  workman,  collecting  the  necessary  jigs,  drawings,  etc.,  and 
sees  that  the  work  is  properly  set  in  the  machine.  He  relieves 
the  workman  of  all  preliminary  planning  as  far  as  placing  the 
piece  in  working  position  is  concerned. 


PLANNING  DEPARTMENTS 


99 


INSTRUCTION   CARD 

NO. 

162 

ORDER 
NO. 

DRAWING 
NO. 

PART 
NO. 

NO.  OF 
PIECES 

MATERIAL 

MO. 

DAY 

YEAR 

.02346 

467 

JA 

40 

+2  C.I. 

6 

8 

1912 

MAN'S  NAME 

MACHINE 

SPEED   BOSS 

Wm  Jones 

Lathe  176 

John  Tracey 

INSTRUCTIONS 

TOOL 

CUT 

FEED 

SPEED 

PIECE 
TIME 

LOT 
TIME 

1 

Preparation 

200 

2 

Set  fixture 

24CC 

200 

3 

Set  piece  in  fixture 

030 

4 

Rough  face 

F2 

.15" 

.05" 

H3 

250 

5 

Change  . 

feed  and  speed 

002 

6 

Rough  bore 

B6 

.06" 

.08  " 

G2 

300 

7 

Ream 

080 

8 

Counterbore 

C3 

016 

9 

Stop  machine  and  take 

10 

work 

out  of  fixture 

018 

11 

Clean  fixture 

004 

12 

Change  speed  and  feed 

002 

13 

Clean  Machine  and- 

14 

Change  work  order 

150 

15 

16 

Add   10%    to  piece  time 

070 

17 

18 

TOTALS  FOR  ONE  PIECE 

772 

550 

TOTAL  TIME  FOR    40    PIECES 

=  772  x   40    +  550 

31.43 

TOTAL  TIME  ACTUALLY  TAKEN  FOR     40     PIECES 

30.20 

WHEN  MACHINE  CANNOT_BE  HUN  AS  SPECIFIED  REPORT  AT  ONCE  TO 

M.  T.  Mason 

SIGNATURE  OF  SPEED 

BOSS 

John 

Tracey 

FIG.  11.  —  INSTRUCTION  CARD.     Hand-written  Instructions  are  Indicated  by 

Italics. 


100     PRINCIPLES   OF   INDUSTRIAL   ORGANIZATION 

The  work  of  the  speed  boss  begins  after  the  piece  is  set  in  the 
machine.  He  sees  that  the  right  tools  are  used  and  that  the 
feeds  and  speeds  are  according  to  instructions.  He  also  in- 
structs the  workman  in  the  best  method  of  doing  the  work. 

The  inspector  is  charged  with  the  duty  of  seeing  that  all  work 
is  up  to  standard  in  workmanship  and  finish. 

The  repair  boss  has  charge  of  all  machines,  belts,  etc.,  and 
sees  that  they  are  kept  in  good  order  and  repair. 

The  shop  disciplinarian  is  responsible  for  discipline  and  good 
order.  He  is  also  the  peacemaker  and  assists  in  adjusting  wages. 
He  represents  the  disciplinary  functions  formerly  executed  by 
the  foreman. 

This  rearrangement  of  duties  virtually  amounts  to  the  re- 
placing of  practically  all  line  organization  below  the  superin- 
tendent with  staff  organization.1  It  is  evident  that  the  extent 
to  which  such  a  reorganization  can  be  carried  in  any  plant  will 
depend  upon  the  size  of  the  plant,  the  character  of  the  product, 
the  personnel  of  the  staff  and  last,  though  by  no  means  the  least, 
the  amount  of  statistical  data  bearing  on  productive  processes 
that  is  available  as  a  basis  for  planning  the  work.  The  possi- 
bility of  successfully  making  such  a  redistribution  of  duties  and 
of  securing  the  manufacturing  advantages  that  should  follow 
this  extended  division  of  labor  depends  also  on  other  factors 
that  introduce  new  needs,  including  new  methods  of  rewarding 
labor. 

56.  Forming  the  Instruction  Card.  In  order  to  be  able  to 
prepare  a  machine-shop-work  order  and  an  instruction  card  as 
shown  in  Fig.  11  the  following  information  regarding  the  work 
in  hand  must  be  available  in  convenient  form : 

(a)  Complete  detailed  drawings  and  other  engineering  infor- 
mation. 

(b)  Complete  information  regarding  special  tools,  such  as  jigs 
and  fixtures,  whether  existent  or  to  be  provided. 

(c)  Complete  information  on  lowest  costs  of  previous  per- 
formances. 

1  The  student  will  find  it  a  useful  exercise  to  rearrange  Fig.  4  to  conform  to 
Mr.  Taylor's  subdivision  of  duties. 


PL  A  NNING 

(d)  Accurate  up-to-date  information  regarding  the  raw  and 
finished  stock  that  is  to  be  used. 

(e)  Exact  knowledge  of  the  progress  of  the  work  in  process. 
(/)  Complete  tabulated  data  on  power,  speeds  and  feeds  of 

all  machines. 

(g)  Complete  data  as  far  as  can  be  obtained  on  the  most  ef- 
fective forms  of  cutting  tools  and  the  best  combinations  of  speeds 
and  feeds  for  the  metal  to  be  cut. 

(h)  Records  of  the  best  performances  on  similar  work  with 
best  combination  of  tools,  feeds  and  speeds. 

And  to  insure  the  attainment  of  the  performance  predicted 
on  the  instruction  card  there  must  be: 

(i)  Careful  instruction  of  the  workmen  by  the  speed  boss  or 
some  similar  person. 

(j)  Careful  following  up  and  correction  of  the  shop  schedule. 

(k)  Careful  inspection  of  all  tools  and  appliances  to  make  sure 
they  are  up  to  standard  conditions. 

(I)  A  financial  incentive  that  will  enlist  the  interest  of  the 
workman. 

Brief  reflection  will  show  that  similar  conditions  and  require- 
ments apply  to  other  forms  of  industry,  the  principles  being 
capable  of  wide  extension. 

Of  these  requirements  several  are  now  fairly  well  met  in  many 
modern  shops.  Thus  (a)  presupposes  a  first-class  engineering 
and  designing  department,  (6)  a  well-developed  tool  room,  (c)  a 
first-class  cost  system,  (d)  an  accurate  continuous  inventory 
system,  all  of  which  have  reached  a  high  state  of  development 
in  many  plants.  The  remaining  requirements,  however,  are  in 
a  rudimentary  stage  in  most  shops  and  it  may  be  of  advantage 
to  discuss  them  briefly. 

57.  Order-of-Work  Methods  (Item  e).  It  is  evident  that  if 
work  is  to  be  accurately  scheduled  through  a  works  of  any  mag- 
nitude, it  must  be  accomplished  by  written  orders  and  by  sys- 
tematic methods.  The  most  usual  method  of  accomplishing 
this  result  in  a  machine  works  is  somewhat  as  follows :  An  order 
box  containing  say  four  compartments  is  placed  near  each  work- 
man. The  upper  compartment  holds  the  instruction  card,  order- 


*  >&IATC£PM£  -OF   INDUSTRIAL   ORGANIZATION 

of-work  card,  etc.,  for  the  job  in  process;  the  next  lower  com- 
partment contains  the  instructions,  etc.,  for  the  next  job  for 
which  the  gang  boss  is  collecting  or  has  collected  the  tools,  jigs, 
etc.;  the  third  compartment  may  be  used  to  hold  instructions 
for  future  work,  the  sequence  of  which  has  not  as  yet  been  deter- 
mined, and  the  lower  compartment  may  be  used  for  suspended 
jobs  on  which  work  has  been  discontinued  temporarily.  In 
the  office  of  the  planning  department  is  placed  a  "  route  rack  " 
or  "  schedule  board  "  containing  groups  of  pockets'  that  are 
duplicates  of  those  in  the  shop;  each  pocket  containing  instruc- 
tion cards  that  are  duplicates  of  those  in  the  corresponding 
pockets  in  the  shop.  When  the  instructions  are  moved  in  the 
shop  from  one  compartment  of  the  order  box  to  another  or  from 
one  machine  to  another,  the  corresponding  change  is  made  on 
the  office  route  rack  so  that  the  route  rack  always  shows  the 
exact  amount  of  work  before  each  man  or  machine.  The  order- 
of-work  man  must  keep  fully  informed  of  the  desired  dates  of 
delivery  of  all  orders  and  of  any  change  in  such  dates.  By 
means  of  the  route  rack  he  can  fully  control1  the  sequence  of 
operations  and  make  estimates  of  the  time  required  to  complete 
work  in  process  or  new  work  on  which  such  an  estimate  is  de- 
sired. Fig.  12  shows  the  schedule  board  of  the  Tabor  Manu- 
facturing Co.  of  Philadelphia.  Here  three  sets  of  hooks  are  used 
for  each  production  center,  the  upper  hooks  of  each  set  holding 
the  order  for  the  work  in  process. 

58.  Data  on  Machines  (Item/).  It  is  evident  that  before  the 
instruction  card  man  can  intelligently  instruct  the  workman 
regarding  the  size  of  cuts  and  feeds  and  speeds  to  be  used,  very 
complete  data  must  be  compiled  bearing  on  the  cutting  power 
and  the  speeds  and  feeds  obtainable  with  each  machine.  This 
information  is  not  available  in  most  shops  and  must  be  collected. 
It.  is  also  evident  that  this  would  be  much  simplified  if  all  ma- 
chines of  the  same  kind  were  made  along  standard  lines.  At 
present  a  machine  of  given  nominal  size  made  by  any  given  man- 
ufacturer is  usually  very  different  in  its  characteristics  from  those 

1  See  Report  of  Conference  on  Scientific  Management  at  Tuck  School 
of  Commerce,  p.  365. 


PLANNING  DEPARTMENTS 


103 


104     PRINCIPLES   OF   INDUSTRIAL   ORGANIZATION 

of  rival  makers.  These  new  methods  will  undoubtedly  have 
some  effect  tending  to  standardize  tools  of  all  kinds. 

59.  Data  on  the  Art  of  Cutting  Metal  (Item  g).  It  would  most 
naturally  be  supposed  that  an  experienced  skilled  workman 
would  know  more  than  anyone  else  regarding  the  best  shapes  of 
cutting  tools  and  most  efficient  combinations  of  feeds  and  speeds 
for  the  work  of  his  particular  calling.  In  simple  trades  this,  or 
corresponding  data,  may  be  easily  obtained,  but,  in  general,  the 
information  possessed  by  the  mechanic  is  empirical  and  based  on 
inherited1  practice  that  is  never  questioned  by  him.  All  trades 
and  callings  abound  in  practices  that  are  transmitted  downward 
with  almost  superstitious  exactness  and  with  little  or  no  thought 
as  to  whether  a  better  way  cannot  be  found.  This  is  very  well 
instanced  in  the  case  of  cutting  of  metals.  Here  (according  to  Mr. 
F.  W.  Taylor)  there  are  twelve  variables  involved  and  it  is  evi- 
dent that  no  man  can  carry  in  his  head  the  best  combination 
for  any  given  case.  Actual  experience  has  shown  this  to  be  so, 
and  has  demonstrated  that  the  best  combination  of  these  varia- 
bles can  be  found  much  more  accurately  by  mathematical  anal- 
ysis than  by  the  best  empirical  knowledge.  A  full  discussion  of 
this  complex  problem  is  beyond  the  scope  of  this  treatise. 

A  considerable  amount  of  general  information  on  this  subject 
has  been  collected2  from  time  to  time  but  the  most  comprehensive 
attempt  to  solve  this  problem  was  that  made  by  Mr.  F.  W.  Tay- 
lor and  recorded  in  full  in  the  Transactions  of  the  American 
Society  of  Mechanical  Engineers.  (Vol.  28  year  1907.)  Mr. 
Taylor's  experimental  work  and  the  laws  that  he  deduced  there- 
from were  reduced  to  mathematical  expressions  by  him  and  his 
assistants.  The  complexity  of  the  problem  will  be  appreciated 
when  it  is  considered  that  no  less  than  twelve  variables  are  in- 
volved. By  means  of  very  ingenious  slide  rules,3  however,  Mr. 

1  One  of  the  best  instances  of  the  empirical  development  of  an  almost 
perfect  tool  is  found  in  the  common  ax  and  ax  handle.     It  would  have  been 
difficult  indeed  to  analyze  this  problem  and  design  the  modern  ax  scien- 
tifically. 

2  See  also  Profit  Making  in  Shop  and  Factory  Management,  by  C.  U. 
Carpenter,  pp.  86-91. 

3  See  Trans.  A.S.M.E.,  Vol.  25,  p.  49. 


PLANNING  DEPARTMENTS  105 

Carl  Barth  succeeded  in  making  these  expressions  usable  and 
with  these  slide  rules  the  most  efficient  combination  of  speeds 
and  feeds  are  quickly  obtained.  Mr.  Taylor's  work  did  not 
cover  all  kinds  of  metals  and  there  is  still  much  to  be  done  in 
other  lines  of  work  before  information  of  this  kind  is  common; 
yet  aside  from  the  actual  results  obtained  the  principles  involved 
are  of  prime  importance  and  the  paper  mentioned  above  will 
repay  reading.  Similar  investigations  are  now  being  made  in 
other  lines  of  work. 

60.  Standard  Performances,  Time  and  Motion  Study  (Item 
Ti}.  What  has  been  said  of  the  average  workman's  ideas  regard- 
ing feeds  and  speeds  is  equally  true  of  his  judgment  of  the  time 
required  to  do  a  given  piece  of  work  and  the  consequent  cost 
thereof.  A  good  cost  system,  therefore,  may  give  fairly  accurate 
data  regarding  costs  of  work  accomplished  but  its  records  are 
not  necessarily  the  best  that  can  be  made  with  a  given  equip- 
ment. In  times  past  piece  rates,  and  estimates  in  general,  have 
usually  been  made  either  by  judgment  on  the  part  of  the  fore- 
man or  the  rate  setter,  if  one  was  employed.  Occasionally  trial 
performances  are  made  to  find  a  satisfactory  basis.  The  in- 
accuracy of  the  first-named  method  of  setting  rates  and  the 
troubles  arising  therefrom  will  be  more  fully  discussed  in  con- 
nection with  a  discussion  of  systems  of  rewarding  labor.  Such 
methods  could,  of  course,  still  be  used  as  a  basis  of  creating  the 
instruction  card,  but  Mr.  Taylor  has  pointed  out  (Trans.  A.S. 
M.E.  Vol.  24,  p.  1423)  a  much  more  accurate  method  of  find- 
ing what  length  of  time  should  be  required  for  any  job  with  given 
equipment  and  conditions.  In  this  method  accurate  measure- 
ment is  made  of  the  time  required  to  do  the  several  detail  parts 
of  a  given  operation.  This  detail  subdivision  is  often  made 
quite  minute  so  that  the  observation  must  be  made  with  a  stop 
watch.  Observations  are  made  of  many  repetitions  of  the  same 
detail  operation  as  performed  by  several  of  the  best  and  most 
rapid  operators  and  the  lowest  observed  time  or  "  unit  time  " 
becomes  a  standard  of  performance  for  that  operation  and  may 
be  used  in  filling  out  an  instruction  card  for  a  repetition  of  the 
operation,  either  in  connection  with  a  similar  piece  of  work,  or 


106     PRINCIPLES   OF   INDUSTRIAL   ORGANIZATION 

in  connection  with  a  different  piece  of  work,  provided  the  detail 
operation  is  the  same  in  each  case.  The  observations  are,  nat- 
urally, taken  from  the  most  rapid  operators  and  can  be  used  as 
standards  and  serve  as  a  basis  for  setting  piece  rate  or  premium 
methods  of  rewarding  labor.  Allowance  must  be  made  for 
fatigue  and  rest  and  some  progress1  has  been  made  in  recording 
data  bearing  on  the  relative  amount  of  rest  that  must  be  allowed 
for  various  kinds  of  work.  It  is  evident  that  the  degree  of  per- 
fection to  which  the  study  of  unit  times  may  be  profitably  carried 
depends  largely  on  the  kind  of  work  and  the  amount  of  repetition 
that  occurs;  but  in  any  case  it  is  evident  also  that  this  method 
of  approaching  the  problem  is  a  great  advance  over  old  empirical 
methods  and  any  rate  setter  will  profit  even  by  its  limited  use. 

The  sequence  of  operations  should,  of  course,  be  carefully  laid 
out  before  observing  unit  times;  but  a  careful  study  should 
always  be  made  of  each  operation  while  timing  it  to  see  if  better 
results  can  be  obtained  by  changed  methods,  tools  or  surround- 
ings. It  has  long  been  recognized  that  more  work  can  be  done 
by  a  man  when  the  work,  tools  and  surroundings,  in  general, 
are  convenient.  Builders  of  machine  tools  have  long  appre- 
ciated and  applied  these  general  principles  in  the  design  of  tools, 
and  manufacturers  interested  in  such  work  as  the  assembling  of 
small  machines  made  up  of  many  parts  have  for  many  years 
paid  considerable  attention  to  the  proper  division  of  work  and 
the  arrangement  of  parts  so  as  to  require  as  little  effort  and 
motion  on  the  part  of  the  workman  as  possible. 

These  methods,  however,  have  in  general  been  confined  to  the 
best  examples  of  mass  production  and  have  not  been  recognized 
as  fully  as  one  might  suppose.  The  work  of  Mr.  Frank  B.  Gil- 
breth2  has  very  ably  called  attention  to  the  fact  that  great  gains 
may  be  made  by  systematic  motion  study  in  all  lines  of  work 
and  particularly  in  the  simpler  trades  where  one  would  not  sup- 
pose such  possibilities  to  exist.  The  elimination  of  unnecessary 
motions  means  less  fatigue  for  the  same  result,  with  a  consequent 
greater  possibility  of  accomplishment.  A  full  discussion  of  this 

1  See  Trans.  A.S.M.E.,  Vol.  24,  p.  1428. 

2  See  Motion  Study,  by  Frank  B.  Gilbreth. 


PLANNING  DEPARTMENTS  107 

important  principle  is  beyond  the  scope  of  this  book,  but  the 
subject  is  worthy  of  the  close  attention  of  manufacturers. 

61.  Methods  of  Insuring  Performance.  (Items  i,j,  k,  I.)  It  is 
clear  that  if 'the  standard  performances  are  based  on  records 
somewhat  lower  even  than  the  best  record  they  will  be  beyond 
the  attainment  of  many  of  the  less  skilled  workers.  It  is  clear, 
also,  that  if  the  output  of  the  factory  is  raised  to  these  stand- 
ards, in  general,  one  of  two  courses  must  be  pursued.  Either  the 
less  skillful  men  must  be  eliminated  and  their  places  filled  with 
better  men  or  they  must  be  educated  and  taught  how  to  raise 
their  performance  to  the  standard.  The  latter  method  is,  of 
course,  the  most  humane  and  in  the  long  run  will  be  the  most 
effective.  Mr.  H.  L.  Gantt  was  the  first,  the  writer  believes,  to 
appreciate  fully  the  opportunities  of  this  field  and  his  work  and 
writings1  on  this  phase  of  shop  management  forms  a  very  val- 
uable addition  to  the  literature  of  general  industrial  education. 

It  is  also  self-evident  that  if  the  planning  department  is  to 
predict  performances  that  can  be  successfully  executed  all  ma- 
chines and  tools  must  be  in  the  first-class  condition  that  the 
planner  must  presume  tljem  to  be.  For  this  reason  the  inspec- 
tion, care  and  repair  of  all  productive  apparatus  should,  if  pos- 
sible, be  under  one  man  whose  business  it  is  to  see  to  these  matters 
and  nothing  else.  Such  a  man  can  earn  his  salary  even  in  a 
comparatively  small  shop.  Under  such  a  system  matters  such 
as  breaking  of  belts  are,  in  large  measure,  obviated  by  pre- 
inspection  and  repair,  and  the  same  principle  applies  to  appa- 
ratus in  general. 

And  last,  and  by  no  means  least,  if  the  worker  is  to  raise  his 
output  to  a  standard  higher  than  he  has  been  accustomed  to  he 
must  receive  extra  compensations  for  his  extra  effort.  Otherwise 
he  will  not  make  the  effort.  It  has  been  noted  previously  (Ar- 
ticle 9)  that  the  worker  is  usually  skeptical  regarding  the  effect 
of  increased  output.  It  is  useless  to  point  out  to  him  that  in- 
creased output  will  tend  to  help  him  because  of  the  ultimate 
good  flowing  from  abundant  production.  The  reasoning  is  usu- 
ally beyond  him;  and  the  only  incentive  that  will  move  him  is 
1  See  Work  Wages  and  Profits,  by  H.  L.  Gantt. 


108     PRINCIPLES   OF    INDUSTRIAL   ORGANIZATION 

an  immediate  gain.  All  efforts  to  increase  production  by  the 
above  methods  usually  are,  and  in  fact  must  be,  operated  in  con- 
nection with  some  method  of  rewarding  labor  that  gives  increased 
compensation  for  increased  effort.  The  various  methods  of 
rewarding  labor  are  more  fully  discussed  in  Chapter  XT. 

62.  Conclusion.  The  foregoing  is  a  very  brief  account  of  the 
more  important  tendencies  in  the  planning  of  factory  operations. 
It  should  be  noted  that  functional  foremanship  and  similar 
methods  are  in  no  way  connected  with  any  particular  form  of 
wage  system,  nor  do  the  methods  discussed  in  this  chapter,  taken 
singly  or  collectively,  constitute  a  complete  philosophy  or  scheme 
of  management  that  will  be  best  for  all  cases.  The  combina- 
tion and  arrangement  that  will  be  best  to  use  will,  necessarily, 
vary  with  the  conditions;  and  what  may  be  good  for  one  place 
would  not  apply  at  all  in  another.  These  methods,  however, 
are  excellent  illustrations  of  the  separation  of  mental  and  man- 
ual processes,  and  the  use  of  division  of  labor,  and  transfer  of 
skill.  The  strong  coordinative  influences  necessary  for  such 
forms  of  organization  are  found  in  the  instruction  card  and  route 
card,  and  the  incentive  of  extra  compensation  for  extra  effort. 
Some  very  complete  applications  of  these  methods  have  been 
made  in  this  country  though,  as  yet,  few  complete  accounts  of 
such  applications  have  appeared. 

Objection  is  often  made,  particularly  by  managers  of  the  older 
type,  to  the  introduction  of  any  such  system  as  described  in  this 
and  the  preceding  chapter  on  the  ground  that  it  adds  to  the  cost 
of  production.  This  may  often  seem  to  be  true  as  most  of  the 
men  employed  in  planning  and  carrying  the  work  through  the 
shop  do  not  work  directly  upon  the  product.  Furthermore  there 
is  no  doubt  that  useless  and  costly  system  is  sometimes  installed 
where  the  conditions  do  not  warrant,  and  in  such  cases  the  cost 
of  the  product  is  necessarily  raised.  There  is  no  virtue  in  system 
of  any  kind  unless  it  is  installed  intelligently  and  with  a  clear 
idea  of  the  results  it  is  desired  to  obtain. 

Usually  there  is  no  difficulty  in.  deciding  how  far  it  is  econom- 
ical to  go  in  providing  system  to  collect  valuable  information,  as 
in  cost  systems,  or  in  system  for  facilitating  the  transmission 


PLANNING  DEPARTMENTS  109 

and  use  of  information  that  will  hasten  operations  and  thereby 
increase  the  efficiency  of  productive  processes  already  existing; 
but  it  is  not  always  easy  to  decide  such  questions  when  they  in- 
volve the  separation  of  productive  processes  into  mental  and 
manual  constituents.  Functional  foremanship,  for  instance,  is 
based  on  a  somewhat  different  reasoning  than  a  cost  system.  A 
cost  system  is  valuable  no  matter  how  large  or  small  the  shop 
may  be,  although  its  characteristics  might  vary  with  the  size  of 
the  shop.  But  all  extensions  of  the  principle  of  division  of  labor 
that  involve  separation  of  mental  and  manual  processes  and 
transfer  of  skill  necessarily  involve  a  reduction  in  the  amount  of 
time  and  labor  actually  spent  upon  the  work  and  an  increase  in 
the  amount  of  planning  or  indirect  labor  expended  upon  it. 
Whether  such  a  rearrangement  of  duties  will  result  in  netting 
a  greater  output  and  reduced  cost  will  depend  on  the  quantity 
to  be  made  and  the  character  of  the  work;  and  it  is  very  easy 
to  over-systematize  unless  these  conditions  are  fully  understood. 
It  eannot  be  disputed,  however,  that  these  principles  do  result 
in  increased  output  and  decreased  cost  when  properly  applied; 
and  the  manager  that  does  not  use  them  as  far  as  the  limitations 
of  his  case  will  allow,  simply  because  he  does  not  believe  in  sys- 
tem of  any  kind,  is  blinding  himself  to  his  opportunities.  A 
further  discussion  of  the  limitations  of  these  principles  is  given 
in  Chapter  XIV. 

REFERENCES : 

Shop  Management,  by  F.  W.  Taylor,  Trans.  A.S.M.E.,  Vol.  24. 
Applied  Methods  of  Scientific  Management,  by  F.  A.  Parkhurst. 
Cost  Keeping  and  Scientific  Management,  by  Holden  Evens. 


CHAPTER   IX. 

PRINCIPLES   OF   COST  KEEPING. 

63.  Need  of  Accurate  Costs.  It  would  seem  to  be  unnecessary 
to  urge  the  need  of  an  accurate  cost  system  for  all  industrial 
enterprises;  yet,  with  the  exception  of  simple  processes,  cost 
systems  that  give  results  approaching  accuracy  are  not  fre- 
quently encountered.  The  reasons  for  this  are  many.  It  is  not 
uncommon  that  the  manager  of  a  large  works  has  grown  up  with 
it,  or  a  similar  one,  from  small  beginnings.  He  may  not  ap- 
preciate that  the  results  that  he  obtained  in  the  smaller  shop  by 
virtue  of  his  strong  personality  cannot  be  so  obtained  either  by 
himself  or  his  subordinates  in  the  larger  shop  with  its  vastly  in- 
creased complexity.  Unless  he  has  kept  fully  abreast  of  the 
times  he  will  not  be  informed  regarding  what  a  good  cost  system 
can  do  and  he  will  likely  object  strongly  to  the  added  clerical 
expense  incident  to  securing  accurate  costs,  because  he  fails  to 
realize  the  full  importance  of  these  results.  To  many  men 
costs  are  simply  records  of  work  accomplished,  the  usefulness 
of  which  are  ended  once  the  goods  are  billed.  It  is  true  that 
this  is  a  most  important  feature  of  cost  accounting,  but  there 
are  other  features  no  less  important. 

Modern  manufacturing  is,  usually,  a  complex  process,  par- 
ticularly where  articles  of  varying  size  or  character  are  made  in 
the  same  works.  It  is  not  sufficient  to  know  that  the  factory 
is  paying  as  a  whole,  especially  when  competition  is  strong  in 
special  lines.  It  is  comparatively  easy  to  determine  whether 
the  plant  is,  as  a  whole,  paying  dividends  but  without  the  aid 
of  a  good  cost  system  it  is  impossible  to  form  any  idea  regarding 
the  profitableness  of  any  single  line  of  product.  With  a  good 
cost  system  the  manager  can  keep  himself  informed  regarding 
shop  operations  as  they  progress  and  can  often  avert  losses  and 
difficulties,  instead  of  waiting  until  the  work  is  finished,  when 
remedy  will  come  too  late.  The  absolute  need  of  statistical  data 

110 


PRINCIPLES   OF   COST   KEEPING  111 

and  condensed  reports  has  already  been  touched  upon.  With- 
out a  good  cost  system  these  are  not  obtainable  and  the  manager 
is  without  one  of  the  most  powerful  aids  in  administration.  If 
work  is  to  be  planned  in  advance  and  if  correct  estimates  are 
required,  whether  as  a  basis  of  securing  new  work  or  of  insuring 
that  productive  costs  shall  not  exceed  market  possibilities,  a  cost 
system  is  indispensable.  This  last  feature  is  a  most  important 
one  and  grows  more  so  daily.  The  custom  of  estimating  costs 
in  advance  of  production  and  then  insuring  that  these  costs  are 
met  in  production,  or  finding  out  only  why  they  cannot  be  met, 
is  coming  more  and  more  into  use  as  the  practice  of  planning 
work  in  advance  becomes  more  common. 

The  necessity  of  accurate  costs  is  of  prime  importance  to  an 
industry  as  a  whole.  The  manufacturer  who  underbids  his 
competitors  on  the  basis  of  faulty  cost  keeping  not  only  works 
his  own  ruin  but  that  of  his  competitors  who  are  bidding  on  a 
sound  basis.  This  form  of  competition  is  the  very  worst  and 
should  be  most  feared.  It  is  no  satisfaction  to  the  manager 
whose  costs  are  correct  to  know  that  the  successful  bidder  is  on 
the  way  to  bankruptcy,  so  long  as  others,  no  better  informed 
regarding  costs,  are  constantly  coming  into  the  field.  On  a 
certain  boiler  installation  that  recently  came  under  the  writer's 
observation  the  bids  on  the  boilers  ranged  from  $11.50  to  $16  per 
H.  P.,  the  bids  on  one  item  of  piping  ranged  from  $5244  to  $7539 
and  on  another  item  of  piping  from  $1200  to  $4493.  The  speci- 
fications for  this  work  had  been  drawn  with  great  care  and  per- 
mitted the  use  of  certain  apparatus  and  material  only;  and, 
making  all  due  allowance  for  the  lowest  bids  being  as  close  to 
the  margin  of  the  specifications  as  possible,  the  only  reasonable 
explanation  of  the  wide  range  of  the  tenders  is  the  lack  of  knowl- 
edge of  the  costs  of  production.  The  necessity  of  wide  publicity 
of  correct  principles  of  cost  keeping  is  obvious,  and  the  successful 
manager  who  once  offered  to  send  his  expert  cost  man  to  teach 
correct  cost-finding  principles  to  any  competitor  was  a  fore- 
sighted  individual. 

A  distinction  should  be  made  between  cost  keeping  and  book- 
keeping or  accounting  as  ordinarily  understood.  The  expert 


112    PRINCIPLES   OF   INDUSTRIAL   ORGANIZATION 

bookkeeper  is  interested  in  costs  only  as  costs.  He  does  not 
know,  usually,  in  what  form  these  costs  should  appear  to  be 
most  effective  in  reducing  expenses  or  in  indicating  tendencies, 
nor  in  what  detail  it  is  necessary  to  collect  shop  returns.  He 
is  not  competent,  therefore,  as  a  rule,  to  lay  out  the  broad  fea- 
tures of  a  cost  system.  The  bookkeeper  is  interested  in  finding 
the  facts;  the  cost  keeper  wishes  to  know  the  reasons  for  the 
facts.  Of  course  cost  keeping  must  conform  to  the  fundamental 
rules  of  accounting,  and  every  cost  keeper  should  be  well  grounded 
in  these  essentials,  but  the  practical  shop  knowledge,  so  essential 
to  the  successful  cost  keeper,  is  very  rarely  found  in  the  possession 
of  any  accountant  who  has  not  been  trained  in  cost-keeping 
methods.  For  this  reason  the  factory  manager  should,  himself, 
be  well  grounded  in  the  principles  of  cost  recording  and  interpre- 
tation and  not  depend,  as  is  too  often  the  case,  on  a  system  built 
up  by  his  bookkeeper  who  is  probably  ignorant  of  the  funda- 
mental principles  of  manufacturing. 

As  manufacturing  becomes  more  complex  and  competition 
grows  more  keen,  the  necessity  of  accurate  costs  becomes  more 
and  more  important.  The  successful  manager  of  the  future  will 
be  not  only  well  informed  regarding  machines  and  their  opera- 
tion, but  he  will,  of  a  necessity,  be  highly  informed  regarding 
costs.  Until  this  comes  about  many  managers  will  continue  to 
sell  for  less  than  cost,  to  declare  dividends  that,  unknown  to 
them,  are  paid  partly  from  capital  stock  and  to  blunder  along, 
penny  wise  and  pound  foolish,  because  of  their  dread  of  added 
clerical  assistance. 

64.  The  Elements  of  Cost.  In  producing  manufactured  goods 
of  any  kind,  by  any  process,  the  manufacturer  buys  supplies 
which,  for  convenience,  he  classifies  as  raw  material.  He  trans- 
forms this  raw  material  into  finished  product  in  his  factory, 
adding  to  its  purchase  price  the  cost  of  the  labor  expended  in 
the  transformation  and  such  other  factory  expenses  as  are  charge- 
able indirectly  to  the  operation,  in  order  to  find  the  total  cost. 
The  most  natural  and  convenient  primary  classification  of  the 
elements  of.  cost  is,  therefore,  material,  labor  and  expense.  It 
should  be  noted,  however,  that  all  values  with  which  the 


PRINCIPLES  OF   COST  KEEPING  113 

facturer  is  concerned  are  in  the  last  analysis  labor  values.  Ma- 
terial becomes  valuable,  in  general,  only  as  labor  is  performed 
upon  it  and  its  potential  value,  as  a  natural  product,  is  usually 
a  small  part  of  its  value  in  a  fabricated  state.  All  efforts  to 
reduce  cost  are,  therefore,  efforts  directly  or  indirectly  to  elimi- 
nate labor  values;  or  in  other  words  to  increase  the  output  per 
labor-hour. 

The  labor  element  of  cost  is  usually  divided  into  two  classes. 
All  work  done  directly  upon  the  product  and  recognizable  as 
pertaining  only  to  the  operations  upon  it  is  called  direct  or 
productive  labor.  But  all  labor  around  a  factory  cannot  be  con- 
nected directly  with  some  piece  of  production.  Thus  the  fire- 
man, the  engineer,  the  oiler,  crane  men,  errand  boys,  office  help, 
etc.,  are  employed  in  activities  that  are  general  and  not  specific, 
or  the  time  that  they  are  employed  on  any  one  job  is  so  short 
as  to  make  intelligent  distribution  of  their  labor  uncertain.  Such 
labor  is  called  indirect1  or  non-productive  labor. 

In  a  similar  way  there  are  two  classes  of  materials.  All  ma- 
terial entering  directly2  into  the  product  is  usually  classed  as 
direct  material.  But,  again,  there  are  many  other  materials  used 
in  a  factory  that  do  not  enter  directly  into  the  product.  Thus 
coal,  oil,  materials  for  repairs,  etc.,  are  all  elements  of  cost  charge- 
able against  product,  but  not  going  directly  into  it,  nor  con- 
nected with  any  one  particular  piece  of  work.  Such  material 
is  called  indirect  or  expense  material. 

Then,  again,  there  are  items  of  expense  that  are  neither  labor 
nor  material,  as,  for  instance,  rent,  taxes,  insurance,  depreciation, 
etc.  These  all  form  part  of  the  cost  of  production  but  cannot 
be  connected  directly  with  some  particular  piece  of  product. 

In  computing  the  cost  of  production  of  a  given  part  it  is  clear 
that  it  is  possible  to  allocate  the  direct  labor  and  direct  materials 

1  The  terms  direct  and  indirect  are  preferable  to  productive  and  non-pro- 
ductive.    All  labor  is,  in  a  strict  sense,  productive  though  perhaps  not  applied 
directly  to  any  article  of  product. 

2  There  are  often  material  items  that  enter  directly  into  product  that  cannot 
very  well  be  accurately  charged  against  specific  pieces  of  work.     Thus  nails, 
screws,  glue,  etc.,  enter  directly  into  product  but  often  in  such  small  quantities 
as  to  make  accurate  accounting  of  them  impossible. 


114     PRINCIPLES   OF   INDUSTRIAL   ORGANIZATION 

chargeable  against  it;  but  the  indirect  labor  and  material  and 
the  expenses,  such  as  rents,  etc.,  are  not  so  readily  allocated. 
These  indirect  charges  are  usually  gathered  together  under  the 
general  title  of  "  burden,"  "  overhead  expense "  or  simply 
"expense."  The  total  cost  of  production,  therefore,  is  made  up 
as  before  noted  of  labor,  material  and  expense. 

Expense,  again,  is  usually  divided  into  two  classes,  since  in 
general  the  functions  of  the  manufacturer  are  two-fold,  namely, 
manufacturing  and  selling.  (See  Fig.  4  and  Art.  43.)  These 
functions,  however,  are  not  dependent  upon  each  other  though 
they  can,  and  should  be,  mutually  helpful.  The  selling  force 
is  usually  an  independent  organization  and  the  head  sales  office 
need  not  be  even  located  at  the  factory.  On  the  other  hand 
many  factories  have  little  or  no  selling  force,  the  product  being 
disposed  of  through  sales  agencies  that  are  entirely  independent 
organizations.  It  is  important,  therefore,  that  the  expenses  in- 
curred in  selling  should  be  kept  separate  from  those  incident  to 
manufacturing.  Hence  expense  is  usually  divided  into  factory 
expense  and  general  expense  so  that  they  may  be  checked  in- 
dependently and  wastes  accurately  located  and  the  efficiency  of 
each  department  determined  separately. 

The  several  subdivisions  of  cost  and  the  several  steps  in  their 
summation  may  be  shown  graphically  as  in  Fig.  13.  The  sum 
of  the  direct  labor  and  direct  material  is  known  as  the  prime  or 
flat  cost.  The  shop  cost,  called  also  manufacturing  or  factory 
cost,  is  found  by  adding  the  factory  expense  to  the  prime  cost. 
This  is  the  summarized  cost  that  the  factory  manager  is  held 
responsible  for  and  includes  all  items  properly  chargeable  against 
production  up  to  and  including  the  delivery  of  the  finished  product 
to  the  stock  room  or  shipping  floor  as  the  case  may  be.  Here  the 
financial  responsibility  of  the  shop  manager  stops.  The  total 
cost  is  the  shop  cost  plus  all  other  expenses  such  as  sales,  adver- 
tising, salaries  of  officials,  shipping,  transportation,  etc.,  incident 
to  marketing  the  product,  and  usually  designated  as  general, 
commercial  or  selling  expense.  To  make  a  profit  the  product 
must  be  sold  for  more  than  the  total  cost  and  the  selling  price 
is  therefore  the  total  cost  plus  the  profit.  The  relative  proper- 


PRINCIPLES   OF   COST  KEEPING 


115 


tions  of  these  items  will,  of  course,  vary  considerably  with  the 
character  of  the  work,  and  the  organization  of  the  factory.  The 
figures  given  in  Fig.  13  are  hypothetical,  but  not  improbable, 
for  general  manufacturing. 

It  is  to  be  noted  that  all  the  items  included  in  the  total  cost 
are  fixed  by  the  nature  of  the  product  and  the  efficiency  of  the 
organization.  The  profit  is,  in  a  way,  arbitrarily  fixed.  It  is 
clear  that  for  a  given  capitalization  and  a  required  percentage 
of  profit  thereon,  the  percentage  that  must  be  added  to  the  total 
cost  to  make  the  selling  price  will  depend  on  the  volume1  of  the 
output.  If  this  volume  is  large  compared  with  the  capitaliza- 
tion the  percentage  added  for  profit  may  be  comparatively  small; 


;  rrice  SIDU  — 

1 

1    Total  Cost   $350 

p  'Prime  Co 

st  $200  - 

$100 
Direct  Material 

$100 
Direct  Labor 

$75 
Factory  Expense 
or  Burden 

$75 
General 
Expense 

$100 
Profit 

FIG.  13. 

if  the  volume  is  small  as  compared  to  the  capitalization  the  per- 
centage added  must  be  larger.  And  if  this  percentage  is  so 
large  as  to  make  the  selling  price  too  high,  competition  will  pre- 
vent sales.  In  such  a  case  the  output  must  be  increased  in 
volume  or  the  cost  of  production  must  be  decreased  to  obtain 
the  desired  profit. 

It  should  be  carefully  noted,  also,  that  a  given  percentage  on 
the  total  sales  is  not  obtained  by  adding  that  percentage  of  the 
total  cost  to  the  total  cost.  Thus,  if  the  total  cost  is  $75  and  it 
is  desired  to  make  25  per  cent  on  the  total  sales  to  give  the  re- 
quired profit  on  the  investment,  the  sales  price  would  not  be 
obtained  by  adding  25  per  cent  of  $75\  to  the  total  cost  of  $75 
since  that  would  give  a  sales  price  of  fe  -f-  $-7/  =  $93.75  and 
the  difference  between  the  sales  price  and  tEe  cost,  or  ($93.75  — 

1  The  use  of  statistical  data  such  as  the  ratio  of  output  to  inventory  is  well 
instanced  here.  See  also  Art.  47.  Note  also  that  the  capitalized  value  may 
and  often  does  exceed  the  actual  or  inventory  value. 


116    PRINCIPLES   OF   INDUSTRIAL   ORGANIZATION 

$75)  is  not  25  per  cent  of  $93.75.  If,  however,  33^  per  cent  is 
added  to  the  total  cost  the  sales  price  is  $100  and  25  per  cent 
taken  from  this  leaves  the  total  cost  or  $75,  hence  the  profit  would 
be  25  per  cent  of  the  sales  price  and  would  bear  the  correct  rela- 
tion to  the  profit  desired  on  the  investment.  Care  should  be 
exercised  that  operations  involving  percentage  are  based  on  cor- 
rect theory,  otherwise  undetected  financial  loss  is  liable  to  occur. 
Errors  of  this  kind  are  more  frequent  than  might  be  supposed. 
65.  Classification  of  Expense.  The  items  that  usually  enter 
into  the  factory  expense  are  those  that  are  incurred  in  actual 
production  and  that  cannot  be  charged  directly  to  some  par- 
ticular piece  of  work.  The  items  that  enter  into  the  general 
expense  are  of  two  classes,  namely,  administrative  and  selling 
expenses.  In  many  cases  it  is  advisable  to  record  the  selling 
expense  separately  in  order  that  the  efficiency  of  the  selling  de- 
partment may  be  determined,  even  though  both  -classes  are 
treated  as  one  in  determining  selling  price.  The  dividing  line 
between  factory  and  general  expense  cannot  always,  however, 
be  sharply  drawn  because  industrial  conditions  vary  so  widely. 
Thus  the  duties  of  the  president,  treasurer  and  similar  officers 
may  include  supervision  of  both  manufacturing  and  sales  and 
their  salaries  should  be  distributed  accordingly.  In  some  cases 
the  selling  and  administrative  cost  may  be  so  small  that  they 
can  be,  without  great  error,  included  in  the  factory  expense.  In 
many  cases  it  is  desirable  to  distribute  such  items  as  interest, 
taxes  and  insurance  in  the  factory  expense,  while  in  others  it  is 
sufficiently  accurate  to  throw  them  all  into  the  general  expense. 
The  following,  however,  are  representative  items  of  factory 
expense : 

Superintendence.  Rent.    _, 

Light.  Insurance. 

Heat.  Taxes. 

Power.  Repairs  and  betterments. 

Salaries  of  watchmen,  etc.    Depreciation. 

Factory  office  salaries.  Defective  material  and  spoiled 

Indirect  labor.  work. 

Interest,  Experimental  (for  factory). 


PRINCIPLES  OF   COST  KEEPING  117 

As  before  stated  the  items  that  enter  into  general  expense 
include  administrative  expenses  and  those  incurred  in  marketing 
the  product  and  will  therefore  include  such  items  as: 

Salaries  of  general  officers.  Expense  of  sales. 

Advertising.  Collecting. 

-\    Legal  expenses.  Accounting. 

Correspondence.  General  office  expenses. 

This  classification  is  in  general  accord  with  the  average  prac- 
tice of  skilled  accountants.  The  nature  of  most  of  the  above- 
named  expenses  and  the  reason  for  so  classifying  them  are  self- 
evident,  but  there  are  a  few  that  will  require  further  discussion. 
These  are  interest,  rent,  taxes,  insurance,  repairs  and  better- 
ments, depreciation,  defective  material  and  spoiled  work,  and 
expenditures  on  experimental  work. 

66.  Interest  and  Rent.  Accountants  and  economists  are  not 
unanimous  in  their  opinions  as  to  the  conditions  under  which 
interest  should  be  charged  against  product.  Clearly  if  the  man- 
ufacturer rents  land  or  buildings  or  machinery  the  rent  that  he 
must  pay  the  owner  represents  a  manufacturing  expense  and  is 
a  just  and  proper  charge  against  product.  If  now  he  is  manu- 
facturing a  varied  product  with  an  equipment  of  varied  value, 
housed  in  buildings  of  different  character  and  cost,  it  certainly 
is  obvious  that  he  should  distribute  the  burden  of  this  rent  with 
reference  to  the  value  of  his  equipment  if  he  would  obtain  the 
correct  cost  of  the  several  lines  of  product ;  and  the  same  remarks 
hold  true  if  his  plant  is  built  and  equipped  with  borrowed  capital 
on  which  he  must  pay  interest. 

If,  however,  the  manufacturer  owns  his  land  and  equipment 
he  is  under  no  such  obligation  and,  apparently,  need  not  include 
a  charge  for  interest  on  his  investment  in  computing  his  cost. 
Nevertheless,  there  are  good  reasons  why  this  should  be  done. 
Clearly  the  money  that  he  has  invested  in  his  plant  would  yield 
him  the  prevailing  market  interest  if  he  simply  loaned  it  and 
made  no  effort  himself  to  employ  it.  Or,  if  invested  in  land  and 
buildings,  it  should  yield  him  interest  in  the  form  of  rent,  with 
no  appreciable  effort  on  his  part.  Unless,  then,  he  takes  this 


118     PRINCIPLES   OF   INDUSTRIAL   ORGANIZATION 

interest  factor  into  account  he  cannot  tell  whether  or  not  he  is 
obtaining  remuneration  for  his  own  exertions  or  in  return  for 
the  added  risk  that  he  assumes  in  working  his  own  capital. 
Moreover,  unless  he  distributes  this  interest  charge  in  proportion 
to  the  value  of  his  equipment  he  cannot  obtain  a  correct  idea 
regarding  what  part  of  his  product  is  paying  him  the  best  re- 
turns, if  his  manufacturing  problem  be  at  all  complex.  The 
counter  crediting  of  such  interest  charge  so  that  the  profit  and 
loss  account  will  show  the  total  profit  is  a  matter  of  bookkeeping 
only.  Of  course  the  manufacturer  that  owns  his  plant  has  an 
inherent  advantage  over  the  man  that  rents  his  plant  or  capital. 
The  latter  must  make  a  minimum  profit  in  order  to  pay  his  in- 
terest, the  former  not  having  this  limitation. 

67.  Insurance  and  Taxes.     It  is  held  by  some  accountants 
that  these  items,  like  interest,  are  attributes  of  capital  and  do 
not  belong  in  manufacturing  expense.     Economically  this  may 
be  true  but  the  object  of  cost  keeping  is  not  to  decide  points  in 
economics  but  to  determine  costs  and  if  the  plant  is  complex  and 
the  product  varied  these  items  should  be  distributed  in  the  fac- 
tory costs. 

68.  Repairs  and  Betterments.     Care  should  be  exercised  in 
charging  off  the  cost  of  repairs.     Obviously,  all  ordinary  repairs 
and  replacements  made  necessary  by  wear  and  tear  are  charge- 
able against  production.     In  the  case  of  rebuilding  a  machine  or 
making  extensive  improvements  upon  it,  however,  it  may  be 
allowable  to  consider  the  work  a  betterment  that  will  add  to  the 
productive  capacity  of  the  machine,  and  hence  creditable  to 
capital  or  plant  investment,  the  inventory  value  of  the  machine 
being  raised  accordingly.     Care  should  be  used  that  such  bet- 
terments really  do  add  to  the  income-producing  capacity. 

69.  Depreciation.     Depreciation   and   repairs   are  intimately 
connected   and  the  former  is  so  important  that  it  is  consid- 
ered justifiable  to  make  it  the  basis  of  a  subsequent  chapter  (see 
Chapter  X). 

70.  Defective  Material  and  Spoiled  Work.     If  a  certain  class 
of  work  is  unusually  difficult  so  that  bad  castings  or  spoiled  work 
is  likely  to  occur  to  a  much  greater  extent  than  in  the  ordinary 


PRINCIPLES  OF  COST  KEEPING  119 

run  of  work,  the  extra  expense  incurred  thereby  should  be  charged 
against  the  particular  class  of  work  concerned,  and  should  be 
considered  as  an  allocable  productive  expense.  The  occasional 
bad  casting  or  piece  of  spoiled  work  should  not,  in  general,  how- 
ever, be  charged  against  the  particular  job  in  which  it  occurs; 
but  the  cost  of  all  such  items  should  be  distributed  in  the  factory 
expense  thereby  distributing  the  loss  over  the  entire  output  in 
the  same  way  as  insurance.  If  this  is  not  done  the  cost  of  the 
penalized  job  may  be  excessively  and  unjustly  high.  If  the 
spoiled  piece  is  one  of  a  large  lot  it  may  be  proper  to  charge  off 
the  cost  of  the  spoiled  part  against  the  cost  of  the  lot.  Lost 
time,  i.e.,  time  paid  for  but  yielding  no  returns,  as  in  the  case  of 
a  delay  through  breakdowns,  is  of  the  same  general  character. 
Such  charges,  however,  should  be  entered  in  the  costs  as  a  sep- 
arate item  so  as  not  to  cause  confusion  in  making  estimates  on 
work  where  such  losses  may  not  apply,  thereby  raising  the  es- 
timated cost  unnecessarily.  It  is  of  as  much  importance  not  to 
have  estimates  too  high  as  it  is  to  avoid  having  them  too  low. 
One  causes  loss  of 'business  through  failure  to  secure  contracts, 
while  the  other  causes  financial  loss  on  the  contracts  taken. 

71.  Experimental  Work.     Experimental  work,  that  has  for 
its  object  the  development  of  better  manufacturing  facilities, 
is  obviously  a  factory  expense.     Experimental  work  that  is  con- 
ducted for  the  purpose  of  securing  engineering  data  is  somewhat 
different  in  character.     Thus  in  developing  a  new  line  of  goods 
it  may  be  necessary  to  do  a  considerable  amount  of  preliminary 
designing  and  experimenting.     The  cost  of  this  may  often  be 
carried  to  a  special  development  account  and  if  the  preliminary 
work  is  consummated  by  placing  the  proposed  line  of  goods  in 
production,  this  development  account  may  be  charged  off  against 
the  product  over  a  predetermined  amount  of  production.     If 
this  is  not  advisable,  or  feasible,  the  preliminary  work  must  be 
charged  off  in  the  general  expense. 

72.  The  Classified  Expense  Order-Number  List.     From  the 
foregoing  it  will  be  seen  that  the  relation  between  factory  ex- 
pense and  general  expense  will  vary  greatly  with  the  character 
of  the  business,  its  size  and  complexity.     A  careful  analysis  of 


120    PRINCIPLES   OF   INDUSTRIAL   ORGANIZATION 

these  relations  must  be  made,  therefore,  and  a  classified  list  of 
expenses  prepared,  covering  in  detail  the  cost  accounts  that  are 
deemed  necessary.  In  a  large  works  these  accounts  may  be 
numerous,  one  large  manufacturing  company  in  this  country 
dividing  its  expense  items  into  one  hundred  and  thirty  accounts. 
All  work  or  material  not  chargeable  directly  to  product  must  be 
charged  to  the  proper  expense  account,  and  in  order  to  do  this 
each  account  must  be  identified  by  a  number  or  letter.  In  small 
works,  where  great  detail  is  not  needed,  the  mnemonic1  system 
of  labelling  accounts  has  been  found  satisfactory.  Thus  the 
account  for  repairs  to  buildings  may  be  marked  R.  B.;  expenses 
for  power,  heat  and  light,  P.  H.  L.  and  so  on.  The  use  of  such 
symbols  is,  however,  limited,  and  in  large  works  cannot,  in  gen- 
eral, be  extended  beyond  general  classifications  of  machinery  or 
accounts.  In  some  works  the  accounts  are  designated  by  num- 
bers, whole  numbers  being  used  for  the  expense  accounts,  which 
usually  are  comparatively  limited  in  number  as  compared  with 
manufacturing  accounts,  for  which  some  decimal  notations  based 
on  the  Dewey2  decimal  system  is  used. 

73.  The  Sources  of  Cost  Data.  As  explained  in  Art.  46  the 
production  order,  Fig.  6,  is  the  most  usual  means  of  putting  a  job 
in  production  and  in  well-managed  shops  no  labor  or  material 
expenditures  are  permitted  without  an  order  of  some  kind. 
Direct  production  is  performed  on  orders  issued  as  needed,  each 
order  bearing  the  assigned  order  number  to  which  the  work  is 
to  be  charged,  a  new  number  being  assigned  to  each  piece  of  new 
work.  The  numbers  or  letters  designating  expense  accounts  are 
more  permanent,  however,  and  for  these  standing  orders  are 
issued  that  are  valid  until  changed  by  the  cost  keeper. 

As  work  of  any  kind  is  performed  the  workman  keeps  a  record 
of  his  time  and  the  order  number  to  which  it  should  be  charged. 
There  are  two  general  ways  of  collecting  this  time.  In  the  first 
method  a  traveling  timekeeper  visits  each  man  daily  and  records 

1  For  further  discussion  of  this  principle  see  Trans.  A.S.M.E.,  Vol.  2,  p.  366, 
Cost  Keeping,  by  S.  H.  Bunnell,  p.  123,  and  Applied  Methods  of  Scientific 
Management,  by  F.  A.  Parkhurst,  pp.  70  and  240. 

2  See   Dewey   Decimal   Classification,   from   Eng.   Dept.,   University   of 
Illinois. 


PRINCIPLES  OF   COST  KEEPING  121 

his  time  charges  in  a  book,  from  which  he  transfers  them  to  the 
cost  record.  The  defect  in  this  method  is  that  the  workman 
depends  too  much  on  his  memory  and  where  he  is  working  on 
several  different  jobs  daily  his  records,  mental  or  written,  are 
likely  to  be  defective.  A  better  and  the  more  modern  way  is 
for  the  foreman  to  issue  him  a  work  card  (Fig.  8)  when  he  begins 
the  job.  This  card  may  be  arranged  as  in  Fig.  8,  so  that  he  can 
check  off  elapsed  time,  or  it  may  be  stamped  in  a  time  clock  at 
the  beginning  and  end  of  each  job.  The  card,  as  will  be  seen, 
contains  somewhat  full  information  regarding  the  work  and  the 
order  number  to  which  it  is  to  be  charged,  and  must  be  approved 
by  the  foreman.  These  cards  are  collected  daily  and  charged 
against  the  several  production  and  expense  accounts.  By  making 
the  cards  of  different  colors  they  may  be  sorted  and  classified 
visually  and  hence  rapidly.  These  work  cards  then  form  the  basis 
of  all  time  charges.  If  the  work  is  being  done  on  a  premium 
or  bonus  system  of  pay,  provision  is  made  on  the  card  for  noting 
the  premium  or  bonus  earned. 

The  production  order  may  be  a  blanket  order  authorizing  the 
foreman  of  a  department  to  proceed  with  a  given  job,  and  the 
foreman  may  have  the  authority  to  requisition  the  store  keeper 
for  the  material  required.  This  requisition  when  filled  and 
priced  may  then  be  sent  to  the  cost  keeper.  Expense  material 
is  most  usually  requisitioned  in  this  manner,  the  requisition 
bearing  the  expense  order  number  to  which  it  is  to  be  charged. 
Where  careful  planning  of  the  work  is  attempted,  however,  the 
production  order  will  list  the  material  needed  (See  Fig.  6),  a 
copy  going  directly  to  the  storekeeper,  who  will  deliver  the  ma- 
terial called  for,  evaluate  the  order,  and  return  it  to  the  cost 
department.  The  detail  in  which  production  orders  may  be 
issued  will,  obviously,  depend  on  the  detail  desired  in  securing 
costs;  and  the  extent  to  which  material  can  be  specified  will 
depend  on  the  amount  of  care  and  detail  bestowed  upon  the 
drawings  and  specifications  emanating  from  the  engineering 
department. 

Other  sources  of  expense,  such  as  gas  bills,  telephone  and  mes- 
senger service,  clerical  help  on  monthly  salaries  and  sundry  minor 


122    PRINCIPLES   OF   INDUSTRIAL   ORGANIZATION 

expenses,  will  all  appear  as  bills  or  pay  vouchers  and  it  is  evident 
that  there  is  little  difficulty  in  securing  fairly  accurate  allocation 
of  labor,  material  and  expense  to  the  several  order  numbers  to 
which  they  belong.  The  real  problem  of  cost  keeping  is  to  dis- 
tribute the  summarized  expense  accounts  fairly  and  equitably 
against  the  production  or  direct  job  numbers. 

METHODS  OF  DISTRIBUTING  FACTORY  EXPENSE. 

74.  Characteristics  of  Expense.  From  the  foregoing  it  will 
be  evident  that  no  serious  difficulty  is  involved  in  finding  the 
cost  of  the  direct  labor  and  material  entering  into  the  production 
of  a  given  part.  It  is  also  evident  that  it  is  possible,  without 
great  complication,  to  classify  the  many  items  included  in  fac- 
tory expense  and  to  find  the  total  amount  of  each  item  for  any 
given  period  of  time.  It  is  not  difficult,  as  will  be  seen,  to  charge 
off  the  total  expense  charges  against  production  so  that  total 
costs  are  fairly  accurate,  but  it  is  exceedingly  difficult,  except  in 
simple  cases,  to  apportion  to  each  shop  order  the  correct  amount 
of  each  expense  account  so  that  it  will  bear  its  own  share,  and 
only  its  own  share,  of  the  burden.  The  reasons  for  this  may  be 
made  a  little  clearer  by  considering  a  little  more  fully  some  of 
the  characteristics  of  expense  items.  Direct  material  and  direct 
labor  are  specific,  tangible  things  that,  as  has  been  shown,  can 
be  accurately  evaluated  for  any  piece  of  work.  But  expense  is 
variable  in  character  and  effect  and  does  not  attach  itself  in  a 
tangible  form  to  the  work  as  it  passes  through  the  shop.  The 
real  problem  of  cost  keeping  is  to  apportion  the  expense  items 
so  that  each  job  shall  bear  its  own  just  share  of  burden.  Unless 
this  can  be  done  with  some  degree  of  accuracy  there  is  no  way 
of  computing  the  true  selling  price  of  the  several  lines  of  work 
even  though  the  total  costs  may  be  sufficiently  accurate  to  fix 
profitable  prices. 

The  total  expense  of  production  is,  in  general,  divisible  into 
two  classes,  namely,  constant  and  variable.  As  Mr.  Going1  has 
very  clearly  expressed  it,  constant  expense  includes  all  items 

1  For  a  very  clear  discussion  of  the  elements  of  cost  and  cost  keeping, 
see  Principles  of  Industrial  Engineering,  by  C.  B.  Going,  p.  79. 


PRINCIPLES  OF  COST  KEEPING  123 

necessary,  so  to  speak,  to  the  mere  existence  of  the  business,  while 
variable  expense  includes  all  items  connected  with  the  activities 
of  the  business.  Thus  rents,  insurance,  taxes  and  depreciation 
of  buildings  remain  practically  uniform  no  matter  what  the 
volume  of  business  in  the  shop  may  be;  or  if  they  change  at  all, 
it  is  occasionally  and  perhaps  by  large  increments  and  then  they 
remain  stationary  again  for  a  long  time.  Moreover,  many  of 
them  can  never  become  zero  no  matter  what  the  state  of  the 
business  may  be.  Salaries  of  general  officers  and  those  that  are 
not  affected  by  a  change  in  volume  of  business  are  also  fairly 
fixed  in  character. 

On  the  other  hand  expenses  such  as  clerical  help,  unskilled 
labor,  power,  oil  and  similar  operating  supplies  .are  affected 
quite  sensitively  by  a  change  in  the  volume  of  business  and  go 
up  and  down  with  it  though  not  usually  in  direct  proportion. 
Thus  it  takes  a  certain  minimum  amount  of  power  to  turn  the 
engine  and  shafting  when  no  productive  work  is  being  accom- 
plished. Any  additional  power  required  will  evidently  be  some 
function  of  the  volume  of  the  work  moving  through  the  shop, 
the  exact  relation  depending  on  the  character  of  the  work.  In 
general  then,  the  relation  of  power  to  volume  may  be  expressed 
by  the  equation 

P  =  C+f(V), 

where  P  =  power  required,  C  =  a  constant  and  /  (V)  =  some 
function  of  the  volume  of  work.  Many  other  expense  items 
are  of  this  general  character,  the  relations  usually  being  far  from 
simple.  Evidently  the  amount  of  either  constant  or  variable 
expense  that  a  job  must  bear  is  dependent  on  the  volume  of  work 
passing  through  the  shop,  this  amount  increasing  as  the  vol- 
ume decreases. 

It  follows,  also,  from  the  above  that  profits  do  not  vary  di- 
rectly in  proportion  to  the  volume  of  business  transacted.  As 
the  volume  of  business  decreases  the  amount  of  expense  that 
must  be  added  to  the  flat  cost  of  every  article  manufactured 
constantly  increases  because  of  the  irreducible  minimum  exr 
pense.  If  the  fixed  expense  is  comparatively  high  the  decrease 
in  business  need  not  be  great  before  the  increased  expense  on 


124    PRINCIPLES   OF   INDUSTRIAL   ORGANIZATION 

each  article  swallows  up  all  profit  and  any  further  decrease  in 
business  will  result  in  a  deficit. 

A  very  disturbing  element  in  allocating  expenses  is  the  manner 
in  which  some  of  them  vary  with  time.  Thus  rents,  insurance 
and  taxes  are  direct  functions  of  time  and  can  be  reasonably 
predicted.  On  the  other  hand  the  repairs  on  a  cupola,  involving 
the  use  of  both  expense  material  and  labor,  are  necessary  be- 
cause of  the  wear  and  tear  incident  to  the  work  of  the  previous 
week  or  month.  Expense  supplies  may  be  purchased  to-day 
because  of  favorable  market  conditions  and  their  use  may  be 
extended  over  several  weeks  or  months.  Evidently  it  would 
not  be  accurate  to  charge  off  accumulated  expenses  of  this  kind 
against  current  production.  Such  expenses  must  be  spread  out 
and  averaged  over  a  reasonable  period  of  time  even  though  this 
period  be  somewhat  arbitrarily  fixed  because  of  the  difficulty 
of  determining  it  accurately.  In  practical  cost  keeping  aver- 
ages of  this  kind  must  be  employed  for  another  reason.  In  most 
cases  once  a  month  is  as  often  as  it  is  convenient  or  possible  to 
close  the  books  and  determine  summarized  costs.  If  now,  every 
job  could  be  started  on  the  first  of  the  month  and  finished  on  the 
last  day  of  the  month,  it  would  be  possible  to  assign  to  each  job, 
as  accurately  as  the  method  employed  would  allow,  its  own  share 
of  the  indirect  expense  incurred  during  the  month  it  was  in  pro- 
duction. But  jobs,  are  finished  regardless  of  the  day  of  the 
month  and,  in  most  instances,  it  is  desirable  to  bill  them  when 
shipped,  so  as  to  collect  the  payment.  Indirect  expense  must, 
in  such  cases,  be  charged  off  on  the  basis  of  the  summarized 
costs  of  the  previous  month  or  other  periods  of  time,  the  propor- 
tions for  the  current  month  usually  not  being  available. 

The  proportion  of  certain  expenses  that  various  jobs  should 
bear  is  dependent  on  the  size  or  weight  of  the  product.  Thus, 
theoretically,1  small  parts  should  not  be  called  upon  to  bear  the 
cost  of  operation  and  maintenance  of  large  cranes,  large  machine- 

1  It  will  be  shown  later  that  although,  theoretically,  small  parts  should  not 
be  taxed  with  expense  incident  to  large  tools,  in  practice  this  procedure  is 
often  necessary  to  prevent  the  cost  of  certain  classes  of  work  from  being  so 
excessively  high  as  to  make  it  unmarketable.  Such  a  condition,  however, 
is  indicative  of  a  weakness  against  competition  in  some  line  of  product. 


PRINCIPLES  OF  COST  KEEPING  125 

tools  and  large  equipment  generally.  Clearly  a  large  casting 
should  bear  more  of  the  expense  incurred  in  repairing  the  cupola 
than  should  a  small  one.  The  same  difficulty  arises  with  ar- 
ticles of  different  character.  An  article  of  one  kind  may  give 
rise  to  indirect  expenditures  that  are  unnecessary  in  articles  of 
another  kind. 

A  similar  complexity  appears  in  considering  the  clerical  work 
of  the  office  and  similar  expenses.  It  may  require  more  of  such 
work  to  put  a  small  complex  machine  through  the  shop  than  it 
would  to  put  through  a  very  large  and  more  costly  machine. 
And  it  can  be  seen  that,  in  general,  the  cost  of  clerical  work  in- 
cident to  a  large  and  varied  line  of  manufacturing  is  so  complex 
as  to  render  absolutely  accurate  allocation  unprofitable  even 
if  it  were  possible.  As  in  the  former  case  it  must  be  turned  into 
the  expense  and  distributed  as  intelligently  as  possible. 

From  the  foregoing  it  is  obvious  that  absolutely  accurate  dis- 
tribution of  expense  is  a  very  difficult  if  not  impossible  problem 
except  in  the  very  simplest  cases,  the  complexity  of  the  problem 
increasing  with  the  complexity  of  the  industry.  In  fact,  dif- 
ferent lines  of  work  in  the  same  factory  may  demand  different 
methods  of  cost  accounting,  which  is  another  reason  for  careful 
departmentization  aside  from  those  arising  from  productive 
processes.  These  features,  no  doubt,  account  to  a  considerable 
extent  for  the  failure,  often,  of  large  expansions  in  a  factory,  or 
the  consolidation  of  factories,  to  produce  expected  results.  In 
the  process  of  enlargement  some  vital  characteristic  of  the  ac- 
counting may  be  lost  sight  of.  The  effect  of  this  lost  item  may 
not  have  been  serious  in  the  smaller  groups,  but  may  prove  very 
disastrous  to  the  enlarged  organization.  The  necessity  of  an 
accurate  system  of  cost  accounting  needs  no  defense.  It  is  as 
much  a  high-grade  tool  as  a  high-grade  lathe  or  planing  machine ; 
but,  compared  with  the  installing  of  a  first-class  machine  tool, 
the  problem  of  instituting  even  a  fairly  accurate  cost-keeping 
system  is,  in  a  large  works,  almost  infinitely  more  complex. 

Now  the  manufacturer  as  a  rule  is  much  opposed  (and  often 
with  good  reason)  to  complex  systems.  What  he  wants,  usually, 
is  something  simple  and  direct;  and  between  the  need  of  ac- 


126    PRINCIPLES   OF   INDUSTRIAL   ORGANIZATION 

curacy  on  the  one  hand  and  the  dread  of  complexity  and  added 
clerical  help  on  the  other,  the  system  adopted  is  often  a  com- 
promise. As  a  consequence  there  have  grown  up  a  number  of 
approximate  methods  of  solving  this  problem  and  the  charac- 
teristics and  limitations  of  the  most  important  of  these  will  be 
very  briefly  discussed.  The  fundamental  idea  on  which  these 
systems  are  based  is  to  use  some  tangible  feature  of  the  job  as 
a  basis  of  comparison  and  by  it  to  measure  off  the  proper  burden 
that  the  job  should  carry.  It  has  already  been  noted  that  direct 
material  and  direct  labor  attach  themselves  to  all  jobs  in  a  defi- 
nite, tangible  and  measurable  manner.  The  time  element  of 
direct  labor  is,  therefore,  also  a  tangible  quantity;  and  if  a  ma- 
chine is  employed  in  the  work  the  time  of  such  machine  service 
can  be  accurately  determined.  The  following  methods  of  dis- 
tribution based  upon  the  above  factors  are  those  in  most  com- 
mon use,  namely,  by  material,  by  percentage  on  wages,  by 
percentage  on  prime  cost  (labor  and  material),  by  man-hours, 
and  by  machine  rates.  Another  and  more  accurate  method  by 
so-called  production  factors  has  been  advocated  of  late  and  will 
also  be  discussed  briefly. 

75.  Distribution  on  Material  as  a  Basis.  In  simple  contin- 
uous processes  where  the  output  consists  of  one  uniform  product 
as  in  a  rail  mill,  a  salt  works  or  a  cement  plant,  it  is  obvious  that 
if  the  expense  incurred  during  a  given  period  be  evenly  divided 
over  the  output  for  the  same  period  the  distribution  will  be  cor- 
rect. If  the  running  conditions  do  not  change  materially,  little 
error  will  be  introduced  if  the  expense  incurred  during  the  next 
preceding  period  of  time  be  used  as  a  basis.  This  is  so,  not  be- 
cause of  the  inherent  accuracy  of  the  method,  but  because  dis- 
tribution in  a  strict  sense  is  not  needed  in  such  cases  but  only 
simple  division  of  the  indirect  expense.  In  fact,  in  such  simple 
cases  the  direct  labor  or  the  flat  cost  would  be  just  as  accurate 
as  a  basis.  But  if  the  product  varies  from  time  to  time,1  or 

1  Thus  a  sawmill  will  turn  out  more  board  feet  of  product  when  cutting  large- 
sized  product  than  when  cutting  smaller  pieces,  the  indirect  expense  remaining 
practically  the  same.  It  is  not  customary,  however,  to  take  cognizance  of  this 
fact  in  distributing  the  expense. 


PRINCIPLES  OF   COST  KEEPING  127 

if  there  is  more  than  one  line  of  product,  these  simple  relations 
no  longer  exist  and  the  introduction  of  material  values  into  the 
computation  of  expense  distribution  is  very  likely  to  distort  the 
results. 

76.  Distribution  on  Direct  Labor  as  a  Basis.  The  use  of  the 
direct  labor  as  a  basis  of  distribution  is  based  on  the  supposition 
that  the  indirect  expense  chargeable  to  a  job  is  proportional  to 
the  direct  labor  expended  upon  it.  It  is,  perhaps,  as  generally 
used  as  any  other  method,  probably  because  of  its  simplicity. 
If  the  'total  direct  labor  for,  say,  a  month  should  be  $5000  and 
the  indirect  expense  for  the  same  time  $2500  then  the  indirect 
expense  is  50  per  cent  of  the  direct  labor  and  by  this  method  the 
indirect  expense  would  be  distributed  by  adding  50  cents  to 
every  dollar  expended  for  direct  labor.  If,  for  instance,  a  ma- 
chine has  been  built  during  the  period  considered,  the  material 
for  which  amounted  to  $200  and  the  direct  labor  to  $400  the  fac- 
tory cost  would  be 

$200  +  $400  +  ($400  X  .50)  =  $800. 

In  practical  operation  the  percentage  used  is,  for  reasons  already 
explained  (see  Art.  74),  not  that  of  the  current  week  or  month 
but  of  the  next  preceding  period  or  the  average  of  several  pre- 
ceding periods. 

If  the  work  is  of  practically  the  same  size  and  character  and 
if  the  wage  rate  does  not  differ  greatly  the  above  method  may, 
in  many  instances,  be  sufficiently  accurate.  But  the  method 
becomes  more  and  more  erroneous  as  the  difference  in  size  and 
character  of  parts  become  greater.  Thus  a  job  involving  $5.00 
worth  of  labor  by  a  man  using  a  hammer  and  file  is  burdened 
by  this  method  with  as  much  expense  as  one  involving  a  similar 
direct  labor  charge  if  done  on  a  $20,000  boring  mill  and  requir- 
ing the  service  of  a  high-priced  overhead  crane.  Yet  the  in- 
terest on  investment  necessary  to  perform  the  latter  operation 
is  very  much  greater  than  for  the  former  both  as  to  cost  of  tools, 
floor  space,  etc.,  to  say  nothing  of  the  greater  expense  for  heat- 
ing, lighting  and  insuring  that  part  of  the  shop  that  houses  the 
boring  mill.  Again,  as  the  volume  of  work  fluctuates  all  lines 


128     PRINCIPLES   OF   INDUSTRIAL   ORGANIZATION 

of  work  seldom  vary  equally,  the  difference  being  more  marked 
when  the  difference  in  size  is  great  and  in  such  cases  one  line  may 
have  to  bear  interest  and  similar  fixed  expenses  belonging  to 
other  lines  to  an  undue  amount. 

One  of  the  greatest  defects  of  this  method  is  its  failure  to  take 
proper  cognizance  of  the  effect  of  elapsed  time  upon  the  costs. 
A  job  that  takes  a  rapid  man,  earning  50  cents  an  hour,  three 
hours  to  perform,  is  taxed  the  same  amount  as  another  job  done 
under  the  same  conditions  by  a  cheaper  man  getting  30  cents 
an  hour  and  consuming  five  hours  for  the  work;  and  the  shop 
cost  of  the  article  does  not  differentiate  between  the  two.  Now 
in  manufacturing,  especially,  "  time  is  money."  Profits  depend 
not  on  cost  alone  but  on  quantity  of  product  (see  Art.  74) ;  and 
the  work  of  the  slow  man  involving  a  longer  use  of  tools,  floor 
space,  light,  etc.,  is,  obviously,  more  costly  than  that  of  his  more 
rapid  neighbor. 

It  is  evident  that  if  all  pieces  of  the  same  size  were  machined 
in  the  same  shop,  as  is  often  the  case  in  a  very  large  works  that 
has  been  departmentized  along  these  lines,  a  varying  and  more 
equitable  percentage  could  be  applied  to  each  class;  and  this  is 
sometimes  done  in  such  ca'ses.  This  principle  has  also  been  ap- 
plied to  shops  doing  mixed  work  by  classifying  the  work  and 
applying  different  percentages  to  the  different  classes,  the  larger 
parts  carrying  the  heavier  burden.  Undoubtedly,  if  this  can 
be  done  and  if  a  graded  percentage  can  be  intelligently  fixed  it 
will  give  better  results  than  the  flat  percentage,  in  all  cases  where 
there  is  variation  in  size  and  weight.  The  difficulties  of  doing 
this  are,  however,  usually  considerable. 

77.  Distribution  on  Prime  Cost  as  Basis.  There  would  seem 
to  be  little  justification  for  this  method  of  distribution  and,  as 
far  as  the  writer  is  aware,  it  is  little  used.  If  the  value  of  the 
material  used  in  the  product  is  very  small  compared  to  the  labor 
put  upon  it  the  method  approaches  the  use  of  direct  labor  as  a 
basis;  while,  on  the  other  hand,  if  the  material  values  are  very 
high  compared  to  the  direct  labor  the  method  approaches  the  use 
of  direct  material  as  a  basis,  and  in  either  case  is  subject  to  the 
limitations  and  errors  of  these  methods  already  discussed.  In 


PRINCIPLES   OF  COST   KEEPING  129 

mixed  manufacturing,  where  one  piece  may  have  a  high  material 
value  and  low  labor  value  and  the  next  piece  may  have  the  rela- 
tive values  of  these  items  reversed  it  is  self  evident  that  the  dis- 
tribution of  expense  by  this  method  will  be  neither  logical  nor 
accurate. 

78.  Distribution  on  Man-Hours  as  a  Basis.  In  distributing 
the  expense  on  this  basis  it  is  assumed  that  the  expense  charge- 
able to  a  piece  of  work  is  proportional  to  the  number  of  man-hours 
expended  on  it.  It  might  seem  that  this  system  would  give  the 
same  results  as  the  percentage-on-wages  method  already  dis- 
cussed, and  this  would  be  so  if  all  men  received  the  same  rate  of 
pay,  since  then  the  labor  cost  would  be  proportional  to  the  time 
consumed.  Thus,  suppose  that,  as  in  the  case  cited  in  discuss- 
ing the  percentage-on-wages  system,  the  total  direct  labor  for 
the  month  is  $5000  and  that  it  is  made  up  of  10,000  man-hours  at 
50  cents  per  hour.  Assume  as  before  that  the  total  indirect 
expense  for  the  month  is  $2500.  Let  the  material  cost  of  the 
job  considered  be  $200  as  before  and  let  the  direct  labor  charge 
upon  it  be  made  up  of  800  man-hours  at  the  given  rate  of  50  cents, 
or  a  total  as  before  of  $400.  Then  the  expense  per  man-hour 

$2500 

chargeable  against  any  job  is  —    — -  =  25  cents  per  man-hour 

1  U,UUiJ 

and  the  expense  chargeable  against  the  job  under  considera- 
tion is  .25  X  800  =  $200,  the  same  as  in  the  percentage-on- 
wages -plan,  and  the  factory  cost  is  $200  +  $400  +  $200  =  $800 
as  before. 

But  suppose  that  the  wage  rate  is  variable,  as  it  most  usually 
is,  and  that  the  labor  cost  of  the  above  job  consists  of  1000  man- 
hours  at  40  cents  an  hour  or  $400  as  before.  Now  the  expense 
chargeable  against  it  is  $1000  X  .25  =  $250  and  the  total  shop 
cost  is  $200  +  $400  +  $250  =  $850.  Again  if  the  direct  labor 
cost  consists  of  400  hours  at  $1  an  hour  the  total  shop  cost  will 
be  $200  +  $400  +  $100  =  $700;  so  that  even  though  the  labor 
cost  may  be  the  same  the  factory  cost  will  be  different  if  the  time 
consumed  varies. 

This  method  has,  therefore,  the  advantage  over  the  per- 
centage-on-labor  plan  of  accenting  the  value  of  the  time  element 


130     PRINCIPLES   OF   INDUSTRIAL   ORGANIZATION 

in  costs,  the  factory  cost  in  general  increasing  and  decreasing 
with  corresponding  changes  in  the  time  consumed.  Like  the 
other  system,  however,  it  fails  to  take  account  of  the  difference 
in  size  and  value  of  the  equipment  used,  all  jobs  consuming  the 
same  amount  of  time  being  burdened  equally,  though  in  one 
case  the  workman  may  be  using  a  hammer  and  chisel  and  in 
another  a  very  costly  machine  tool.  Like  the  percentage-on- 
wages  system  it  will  give  satisfactory  results  only  when  the  class 
of  work  and  the  machines  employed  are  fairly  uniform  in  size. 
Or,  as  Mr.  Church  l  has  expressed  it,  "  where  we  have  a  simple 
set  of  facts  to  represent  their  representation  is  an  equally  simple 
matter." 

79.  Distribution  by  Machine  Rate.  The  machine  rate  is  a 
very  old  conception  and,  no  doubt,  has  its  origin  in  an  instinctive 
effort  to  equalize  in  some  degree  the  varying  cost  of  production 
caused  by  the  use  of  tools  and  processes  of  varying  size  and 
value.  It  was  in  use  long  before  the  days  of  refined  accounting 
methods,  so  common  to-day,  and  in  its  original  form  made  no 
attempt  to  insure  an  accurate  distribution  of  the  total  factory 
expense.  It  attempted,  rather,  simply  to  equalize  such  factors 
of  expense  as  naturally  attach  themselves  to  machines  and  proc- 
esses as,  for  instance,  power,  interest  on  investment,  depre- 
ciation and  Repairs.  The  entire  equipment  was  divided  into 
classes  by  size  or  value,  and  a  graded  charge  per  hour  was  fixed 
for  each  class,  a  machine  in  this  sense  being  any  tool  or  process 
from  a  vise  to  the  largest  boring  mill.  Thus  the  charge  per 
hour  for  a  vise  hand  might  be  50  cents,  while  the  hourly  rate 
for  a  large  boring  mill  might  be  $5. 

The  theory  on  which  the  machine  rate  rests  is,  without  doubt, 
much  more  accurate  than  that  which  underlies  any  of  the  meth- 
ods previously  discussed.  Most  of  the  items  of  expense  do  not 
connect  themselves  naturally  with  wages  but  do  most  naturally 
gather  around  machines  and  processes.  Nor  do  they  collect  as 
a  uniform  layer  over  wages  or  time  but  gather  in  varying  quan- 
tity around  machines  and  processes.  The  rate  of  pay  and  the 
time  consumed  being  equal,  it  costs  a  great  deal  more  to  do  a 
1  Expense  Burden,  by  A.  H.  Church,  p.  34. 


PRINCIPLES  OF   COST  KEEPING  131 

piece  of  work  on  a  large  mill  than  on  a  vise,  since  the  larger  tool 
costs  more,  originally,  and  such  items  as  repairs,  power,  insur- 
ance, heat,  light,  housing,  etc.,  are  all  greater  in  like  propor- 
tion. It  was  most  natural,  therefore,  that  this  method  should 
be  extended  to  the  problem  of  distributing  the  total  shop  expense, 
for  it  is  to  be  especially  noted  that  this  method  of  distribution 
applies  the  burden  at  the  time  and  place  that  the  work  is  per- 
formed; and  if  the  machine  rate  is  correct  for  the  existing  con- 
ditions of  production  the  result  must  be  much  more  accurate 
than  that  of  any  of  the  averaging  methods  discussed,  for 
all  cases  where  the  machines  and  processes  vary  in  size  and 
value. 

In  determining  rates  for  the  purpose  of  distributing  the  total 
expense,  all  items  of  expense  are  apportioned  so  that  each  ma- 
chine or  process  bears  its  own  just  share  of  the  expense  as  nearly 
as  possible.  The  total  of  such  allocated  expenses  assigned  to 
any  machine1  is  then  divided  by  the  estimated  number  of  hours 
the  machine  may  be  expected  to  be  in  operation  during  the 
period  considered,  this  estimate  being  checked,  if  possible,  by 
records  of  past  performances.  This  gives  the  hourly  rate  of  the 
machine  and  every  job  that  passes  through  it  is  charged  ac- 
cordingly. Obviously,  if  this  allocation  be  correct,  and  if  each 
job  be  properly  assessed  as  it  passes  through  the  several  proc- 
esses, and  also  if  all  machines  are  in  operation  the  exact  time 
estimated,  all  the  indirect  expense  will  be  distributed  in  propor- 
tion to  the  use  that  has  been  made  of  the  various  machines  and 
processes. 

The  theory  of  the  method,  as  before  stated,  seems  very  ac- 
curate; but  the  difficulty  begins  when  any  departure  is  made 
from  the  estimated  time  that  machines  are  in  operation.  If  a 
machine  fails  to  run  up  to  this  normal  time  an  undercharge  is 
made;  if  it  is  in  operation  more  than  the  normal  time  an  over- 
charge is  made.  This  last  may  not  be  so  serious,  but  when  the 
volume  of  the  work  is  even  slightly  decreased  and  a  few  ma- 

1  A  machine  in  this  sense  would  be  any  actual  machine,  or  a  vise  or  in  fact 
any  place  where  a  workman  is  employed,  if  full  distribution  of  expense  is  to 
be  attempted  in  this  manner. 


132     PRINCIPLES   OF   INDUSTRIAL    ORGANIZATION 

chines  1  become  idle,  a  large  undercharge  is  incurred.  This  un- 
distributed expense  due  to  machines  being  idle  does  not  appear 
in  the  cost  of  production  and  is  lost  sight  of  until  it  appears  in  the 
totals  of  the  profit  and  loss  account.  Any  approach  to  accuracy 
depends,  therefore,  on  every  machine  and  process  being  in  oper- 
ation the  exact  amount  of  time  used  in  estimating  the  machine 
rate.  Such  conditions  seldom  prevail  in  any  shop. 

There  is  one  objection  that  is  sometimes  raised  against  the 
machine  rate  and  that  is  the  large  amount  of  expense  that,  under 
this  method,  is  charged  against  a  job  that  is  done  in  a  machine 
larger  than  is  actually  required  for  the  process,  because  of  smaller 
machines  being  oversupplied  with  work.  This  makes  the  cost 
of  this  so-called  "penalized"  job  appear  excessive;  and  if 
taken  as  a  guide  for  future  work  is  misleading.  On  the  other 
hand  the  fact  that  it  is  high  is  an  instant  indication  that  the 
most  economical  process  is  not  being  employed  and  points  at 
once  to  a  weakness  in  the  manufacturing  equipment.  It  is 
better  to  know  that  the  cost  is  high,  and  to  be  able  to  find  the 
reason,  and  make  such  allowance  as  may  be  necessary,  than  it  is  to 
have  an  undiscovered  weakness  in  the  manufacturing  processes. 

80.  The  Machine  Rate  and  Supplementary  Rate.  An  effort 2 
has  been  made  to  compensate  for  the  error  introduced  into  the 
machine  rate  when  machines  do  not  run  up  to  their  estimated 
normal  time  by  the  introduction  of  a  so-called  supplementary 
rate.  The  operation  of  this  auxiliary  rate  is  as  follows:  Such 
expenses  as  can  be  apportioned  to  machines  and  processes  are 
so  allocated  and  charged  off,  as  before,  by  a  machine  rate.  A 
record  is  kept  of  all  expense  actually  charged  off  in  this  manner 
and  at  the  end  of  the  month  the  total  of  such  distributed  ex- 
penses is  subtracted  from  the  total  expense  that  should  have  been 
distributed.  The  difference  is  the  undistributed  expense  and 
this  may  be  distributed  as  an  hourly  charge  over  the  several 
jobs  or  by  proportioning  it  over  the  jobs  as  a  percentage  on  the 

1  The  error  from  this  source  is  magnified  by  the  fact  that  in  dull  times  the 
large  machines  whose  rates  are  highest,  and  hence  discharge  more  expense 
per  hour,  are  usually  the  first  to  be  out  of  work,  and  the  last  to  be  in  operation 
as  times  improve. 

2  See  The  Distribution  of  Expense  Burden,  by  A.  H.  Church,  p.  46. 


PRINCIPLES  OF   COST  KEEPING  133 

expense  already  allocated  to  them.  If  all  the  machines  have 
operated  up  to  a  normal  time  the  undistributed  balance  at  the 
end  of  the  month  will  consist  only  of  the  general  shop  expenses 
that  cannot  be  distributed  by  the  machine  rate  and  this,  usually, 
is  a  comparatively  small  amount.  The  undistributed  balance 
then  becomes  a  gauge  of  the  time  efficiency  of  the  shop  and  a 
valuable  index  of  how  closely  it  is  working  up  to  its  capacity. 

81.  Distribution  by  Production  Centers.  The  inherent  ad- 
vantages of  the  machine  rate  has  led  Mr.  A.  Hamilton  Church  l 
to  propose  a  more  refined  application  of  its  underlying  theory. 
Suppose  the  factory  under  consideration  to  consist  of  a  large 
number  of  small  units  separated  physically  from  each  other  but 
supplied  from  central  sources  with  such  general  requirements 
as  heat,  light  and  power  in  such  a  way  that  all  such  require- 
ments could  be  accurately  charged  up  against  each  unit.  Sup- 
pose, further,  that  these  units  are  of  different  sizes  and  contained 
processes  and  machines  of  varying  character  and  size.  Let  it 
be  further  supposed  that  the  owner  of  the  factory  operated 
some  of  these  units  personally  and  rented  others  to  employees. 
Obviously,  he  could  not,  and  would  not,  charge  off  his  general 
shop  expenses  by  any  system  of  averaging,  but  would  be  com- 
pelled to  consider  each  unit  separately,  keeping  a  separate  record 
of  each  and  every  "  service  "  or  "  production  factor  "  and  of  the 
exact  amount  supplied  to  every  production  unit  or  "  production 
center  "  as  these  units  may  be  called.  Thus  it  would  be  pos- 
sible to  apportion  to  each  unit  the  expense  incurred  because  of 
the  land  and  building  it  occupied,  the  insurance  and  depreciation 
of  the  building  and  the  cost  of  heating,  lighting  and  supplying 
power.  Other  items  of  general  service  such  as  transportation, 
stores,  telephone  service,  supervision,  etc.,  might  be  more  diffi- 
cult to  apportion  accurately;  but  a  fair  approximation  could  be 
made,  in  fact,  would  have  to  be  made,  the  owner  keeping  a 
separate  account  of  each  and  every  service  rendered. 

Obviously,  also,  if  a  tenant  renting  one  of  these  units,  wished 
to  compare  his  costs  of  production  with  a  neighbor,  whose  unit 

1  See  Distribution  of  Expense  Burden,  p.  46,  also  Production  Factors, 
by  the  same  author. 


134    PRINCIPLES   OF   INDUSTRIAL   ORGANIZATION 

was  larger  or  smaller,  he  could  reduce  his  several  expenses  to 
such  a  form  as  would  make  comparison  easy.  Thus  his  rent 
could  be  expressed  as  so  many  dollars  per  square  foot  of  ground 
occupied,  and  his  light  and  heat  in  similar  terms;  and  if  he  had 
more  than  one  machine  in  his  unit  these  rates  could  be  used  in 
determining  the  relative  cost  of  production  between  machines. 
Moreover,  knowing  just  what  these  several  expenses  were  for  a 
given  period  of  time  he  could  add  thereto  those  expenses  that 
were  directly  connected  with  his  tool  or  process,  such  as  inter- 
est, depreciation,  oil,  etc.  Then  by  estimating,  or  otherwise 
determining  the  number  of  hours  that  his  machine  or  process 
would  be  in  operation  during  that  time,  he  could  calculate  a 
machine  rate,  as  explained  in  the  foregoing  paragraph,  that 
would  discharge  all  this  expense  as  the  work  passed  through  his 
machine  or  process.  His  floating  expenses  that  could  not  be  so 
reduced  would  be  discharged  as  a  supplementary  rate  which 
would  also  care  for  discrepancies  in  his  estimates  of  his  machine 
hours. 

Now  Mr.  Church  contends,  and  with  good  reason,  that  these 
conditions  do  not  change  simply  because  the  walls  are  taken 
away  from  the  small  units  and  a  large  building,  housing  them 
all,  is  erected  instead.  His  argument  is  that  the  manufacturer 
should  still  keep  these  several  expenses  as  separate  accounts,1 
and  still  considering  each  machine2  or  process  as  a  "  production 
center,"  assess  it  for  each  service  according  to  an  accurately  de- 
termined or  "  scientific  "  rate.  The  production  factors  that 
can  be  so  treated  and  the  methods  of  reducing  them  to  charge- 
able terms  he  lists  as  follows: 

Land-building  factor,  measured  by. .  floor  area. 

Power  factor,  measured  by horse-power  used. 

Lighting  factor,  measured  by floor  area. 

Heating  factor,  measured  by floor  area. 

1  Mr.  Church's  system  of  control  accounts  by  which  he  proposes  to  keep 
track  of  the  several  production  factors  is  most  interesting  but  is  beyond  the 
scope  of  this  book.     See  Production  Factors,  by  A.  H.  Church,  p.  138. 

2  Machine  and  process  here,  as  before,  meaning  any  piece  of  apparatus 
or,  in  the  case  of  handworkers,  a  stationary  place  to  work. 


PRINCIPLES   OF   COST  KEEPING  135 

Organization  factor,  measured  by ...  simple  division. 
Supervision  factor,  measured  by.  ...  special  determinations. 
Stores-transportation    factor,    meas- 
ured by special  determinations. 

In  addition  each  machine  or  production  center  would  be 
charged  with  the  expenses  arising  out  of  the  character  of  the 
machine  itself  as,  for  instance,  interest  on  first  cost,  insurance  on 
the  tool  itself,  repairs,  supplies,  and  wear  and  tear  on  cutting  tools 
and  special  fixtures.  All  of  these,  as  before  noted,  can  be  reduced 
to  a  machine  hour  rate  and  can  be  charged  off  as  the  work  moves 
through  the  machines  or  process,  the  supplementary  rate  caring 
for  the  comparatively  small  amount  of  expense  that  cannot  be 
allocated  in  this  manner,  and  also  for  the  discrepancies  due  to 
variations  in  the  machine  time  from  the  normal  estimate. 

The  philosophy  of  this  method  is  sound  and  where  it  can  be 
realized  it  will  no  doubt  give  very  accurate  results.  There  are, 
however,  several  serious  difficulties  in  operating  it.  The  pre- 
liminary study  and  preparation  necessary  to  install  accurately 
such  a  system  would  be  great  even  in  factories  of  moderate  size, 
and  in  very  large  works  would  be  exceedingly  difficult  if  not  im- 
possible. Some  of  the  production  factors,  such  as  heat,  light 
and  insurance  on  buildings  can,  perhaps,  be  allocated  in  almost 
any  factory  with  an  approach  to  accuracy.  In  the  case  of  power, 
especially  where  large  amounts  are  used  in  a  variable  way  for 
testing  and  where  complex  systems  of  shafting  and  belting,  air 
and  hydraulic  distribution  serve  many  and  varied  machines, 
accurate  allocation  is  impossible;  or  at  least  would  require  such 
elaborate  system  as  to  make  the  net  gain  realized  doubtful.  In 
comparing  the  accuracy  of  distribution  of  this  system  with  the 
averaging  methods  formerly  discussed  it  must  be  kept  in  mind 
that  some  of  the  production  factors  themselves  are  based  on 
averages.  Buildings  are  not  heated  or  lighted  at  the  same  rate 
all  the  year  around,  repairs  to  buildings  and  machinery  are  not 
proportional  to  elapsed  time,  and  expense  material  may  be 
bought  to-day  that  may  not  be  used  for  several  weeks  or  even 
months.  Moreover,  as  already  noted,  it  is  not  always  possible, 
or  at  least  desirable,  to  wait  until  the  end  of  the  month  to  bill 


136     PRINCIPLES   OF   INDUSTRIAL   ORGANIZATION 

goods  that  are  shipped  early  in  the  month.  If  bills  are  to  be  sent 
out  promptly  with  the  shipment  the  production  factors  and  sup- 
plementary rate  must  be  based  on  records  of  previous  perform- 
ances; in  fact,  in  a  large  works,  where  many  small  shipments 
are  made  daily,  this  supplementary  rate  would  have  to  be  de- 
termined by  previous  performance,  for  the  work  of  going  back 
over  the  months  shipments  and  making  a  redistribution  would 
involve  a  very  great  periodic  increase  in  clerical  labor.  Any 
claims  to  refined  accuracy  in  this,  or  in  fact  in  any  other  method 
of  distributing  expense,  must,  therefore,  be  taken  with  caution. 
Nevertheless,  the  machine  rate  offers  a  more  logical  method  of 
solving  this  problem  than  any  other.  It  will  probably  be  some 
time  before  an  extended  use  of  the  refined  method  outlined  by 
Mr.  Church  is  realized;  but  a  machine  rate  for  classes  or  groups 
of  machines  can  be  readily  applied  and  is  in  fact  in  common  use; 
and  there  is  no  doubt  but  that  this  method  in  connection  with 
the  supplementary  rate  offers  the  best  solution  of  the  problem 
for  most  plants  with  diversified  equipment. 

82.  Distribution  of  General  Expense.  The  general  expense1 
(see  Art.  64)  consists,  strictly  speaking,  of  two  parts,  the  ad- 
ministrative expense  of  operating  the  factory  and  the  selling 
expense.  This  expense  cannot,  usually,  be  charged  against 
specific  production  orders,  the  connection  between  selling  and 
manufacturing  being,  most  usually,  very  vague.  It  is  often 
possible,  however,  to  apportion  this  general  expense  between 
the  several  lines  of  product  with  some  degree  of  fairness,  espe- 
cially when  the  works  are  so  large  that  the  administrative  and 
sales  department  are,  of  a  necessity,  departmentized.  These 
expenses  are  most  usually  distributed  over  the  factory  cost  as  a 
percentage.  Thus,  suppose  that  the  total  output  of  the  factory 
for  a  given  month  is  $200,000  and  that  the  general  expense  for 
the  same  period  is  $50,000.  Then  the  percentage  by  which  the 
factory  cost  of  each  article  must  be  increased  in  order  to  absorb 

50,000 
the  general  expense  is  —  -  -  •  =  25  per  cent.    Similar  reason- 


1  The  duties  of  some  officials  may  be  divided  between  these  two  divisions 
of  the  work  and  their  salaries  would  then  be  so  distributed. 


PRINCIPLES   OF   COST   KEEPING  137 

ing    applies    if    the   general   expenses   are  apportioned  to   de- 
partments. 

It  may  be  desirable  in  some  works  to  keep  the  sales  expenses 
entirely  separate  from  the  general  administrative  expenses,  in 
which  case  the  selling  expense  is  sometimes  distributed  as  a 
percentage  over  the  gross  cost,  i.e.,  the  factory  cost  plus  admin- 
istrative expense. 

It  should  be  carefully  noted,  also,  that  the  ratio  of  burden  to 
direct  labor,  or  burden  to  prime  cost,  or  the  ratio  of  indirect  labor 
to  direct  labor  is  not  necessarily  an  index  of  the  efficiency  of  the 
factory.  It  is  true,  of  course,  that  all  indirect  expenses  should  be 
carefully  guarded  for  they  tend  naturally  to  increase  unnecessarily 
unless  carefully  watched.  As  the  quantity  to  be  produced  in- 
creases, however,  it  becomes  increasingly  easy  to  separate  mental 
and  manual  processes  and  to  apply  transfer  of  skill;  and  the  appli- 
cation of  these  principles  usually  increases  the  ratio  of  the  indirect 
labor  charge  to  the  direct  labor  charge.  To  illustrate,  suppose 
there  was  just  enough  of  some  product  to  keep  five  men  busy  on 
standard  lathes,  but  not  enough  to  warrant  the  purchase  of  an  au- 
tomatic lathe  for  the  work.  Then  the  direct  labor  charge  would 
be  the  wages  of  the  men  employed,  and  if  the  work  was  of  small 
size  involving  no  high-priced  designer  the  indirect  labor  charge 
would  be  small.  If  now,  the  quantity  is  increased  so  as  to  warrant 
the  purchase  of  a  full  automatic  machine  for  the  work,  and  the 
work  is,  consequently,  transferred  from  a  general  machine  floor  to 
an  automatic  machine  floor,  the  labor  on  the  parts  will  probably 
be  of  the  indirect  class  entirely,  as  the  duties  of  the  men  in  the 
automatic  room  are  so  varied  as  to  make  accurate  allocation  im- 
possible. It  is  clear,  however,  that  in  this  case  the  total  cost  of 
the  parts  concerned  will  be  greatly  reduced  though  the  indirect 
charges  will  be  greatly  increased,  and  the  direct  labor  charges  re- 
duced to  zero.  As  a  matter  of  fact  it  may  be  that  a  high  direct 
labor  charge  and  a  low  indirect  labor  charge  may  be  an  index 
of  bad  management  rather  than  an  index  of  cheap  production. 

83.  Summary.  From  the  foregoing  brief  outline  of  the  meth- 
ods of  distributing  expense  it  will  be  seen  that  the  problem  is 
usually  a  difficult  one  and  not,  in  general,  capable  of  exact  so- 


138    PRINCIPLES   OF   INDUSTRIAL   ORGANIZATION 

lution.  There  are,  however,  certain  fundamental  principles 
that  should  not  be  lost  sight  of,  no  matter  what  the  system 
adopted  may  be.  The  method  adopted  should  be  as  simple  as 
the  problem  will  admit.  Thus,  it  would  be  folly  to  install  an 
elaborate  machine-rate  method  in  a  continuous  process  plant 
manufacturing  a  single  commodity,  where  a  percentage-on- 
material  method  is  amply  accurate.  Again,  in  cases  where  a 
few  lines  of  goods  are  made  on  small  machines  of  low  value  the 
percentage-on-wages  or  the  hourly  burden  method  may  be  fully 
adequate.  Where  the  lines  of  production  vary  widely  in  size 
and  character  these  simple  systems  are  not  sufficiently  accurate, 
and  the  carefurmanager  will  go  as  far  as  he  can  in  the  direction 
of  the  machine  rate.  Almost  any  shop  can  be  departmentized 
and  the  indirect  expense  distributed  with  a  fair  degree  of  ac- 
curacy between  departments.  How  far  beyond  this  the  man- 
ager can  go  economically  will  depend  on  conditions.  In  any 
case  he  should  see  to  it  that  all  costs  are  distributed.  On  the 
other  hand  if  he  employs  a  professional  organizer  to  assist  him 
he  will  do  well  to  have  a  clear  understanding  in  the  beginning 
of  just  what  costs  he  desires  to  obtain  and  not  install  a  lot  of 
useless  detail,  the  expense  of  which  more  than  offsets  the  gain. 
There  is  a  great  difference  between  principles  and  the  detail  to 
which  they  may  be  carried.  The  expert  organizer  should  be  a 
master  of  the  principles  involved  and  be  able  to  install  a  satis- 
factory system;  the  manager  on  the  other  hand  should  be  able 
to  guide  him  in  the  matter  of  detail.  The  two  working  together 
should  be  able  to  install  a  system  that  will  obtain  the  desired 
results  at  minimum  expense. 

REFERENCES  : 

Expense  Burden,  by  A.  Hamilton  Church. 

Production  Factors,  by  A.  Hamilton  Church. 

Principles  of  Industrial  Engineering,  by  C.  B.  Going. 

Cost  Keeping  and  Scientific  Management,  by  Holden  A.  Evans. 

Cost  Keeping  for  Manufacturing  Plants,  by  Sterling  H.  Bunnell. 

Factory  Organization,  by  Hugo  Diemer. 


CHAPTER  X. 

THE  DEPRECIATION   OF  WASTING  ASSETS. 

84.  Nature  of  Depreciation.  The  assets  of  any  industrial 
undertaking  are  usually  divisible  into  two  classes,  namely,  fixed 
assets  and  floating  assets.  Under  fixed  assets  are  included 
land,  buildings  and  machinery  necessary  for  the  work;  while 
under  floating  assets  are  included  the  purchased  materials  oper- 
ated on,  with  such  supplies,  cash,  bills  receivable,  etc.,  as  are 
a  necessary  part  of  the  business.  The  total  amount  of  the 
assets  may  be  fairly  constant,  but  the  distribution  of  this  total 
among  the  several  classes  of  assets  may  vary  constantly  with 
variations  in  the  business.  Now,  manifestly,  some  of  these 
forms  of  assets  are  stable  and  do  not  necessarily  change  in  value, 
or  if  they  change  it  is  by  slow  degrees.  Thus  the  land  may 
appreciate  slowly,  or  the  purchasing  power  of  the  cash  may 
slowly  increase  or  decrease  depending  on  many  circumstances. 

Other  forms  of  invested  capital,  however,  constantly  tend  to 
decrease  in  value  whether  the  business  is  operated  or  not.  Thus, 
the  buildings  waste  away  because  of  the  action  of  the  elements 
and  also  by  reason  of  wear  and  tear  incident  to  the  industry. 
Machinery  and  furniture  of  all  kinds  tend  to  wear  out  and  must 
be  renewed.  Purchased  material,  that  has  been  fabricated  into 
saleable  product,  may  depreciate  greatly  if  held  in  store  too 
long,  either  from  the  action  of  the  elements  or  from  being  su- 
perseded by  other  types  of  product.  Even  unworked  material 
may  depreciate  to  scrap  value  by  reason  of  changes  in  design 
or  manufacturing  processes,  especially  if  it  is  of  special  character 
and  not  a  standard  market  commodity.  These  two  last  forms 
of  depreciation  are  particularly  likely  to  occur  in  new  industries 
where  the  development  is  rapid. 

Invested  capital  may  be  lost  in  one  of  two  ways;  and  for  con- 
venience these  may  be  distinguished  as  losses  on  capital  account 
and  losses  on  revenue  account.  If  an  uninsured  ship  is  lost  at 

139 


140    PRINCIPLES   OF   INDUSTRIAL   ORGANIZATION 

sea  or  an  uninsured  building  is  burned,  the  loss  is  clearly  a  loss 
of  capital  that  has  nothing  to  do  with  depreciation.  To  replace 
such  losses  the  owner  must  furnish  new  capital  whether  he  takes 
it  from  his  surplus  savings  or  borrows  it  elsewhere;  but  clearly 
no  allowance  for  wasting  depreciation  that  he  makes  on  his  re- 
maining property  can  be  properly  said  to  replace  the  loss. 

Losses  on  revenue  account  are  those  incurred  as  the  result  of 
trading.  Thus,  if  a  company  begins  business  with'  a  total  cap- 
ital of  $200,000  and  at  the  end  of  the  year  has  its  original  equip- 
ment (having  suffered  no  loss  on  capital  account)  but  finds  that 
after  proper  allowance  is  made  for  wasting  losses  it  possesses 
only  $150,000,  it  has  suffered  a  loss  of  $50,000  on  revenue  ac- 
count. Depreciation  is  one  of  the  elements  that  enter  into  and 
intimately  affect  loss  or  gain  on  revenue  account  and  the  above 
distinction  is  important. 

Investments  that  unavoidably  deteriorate  through  the  action 
of  the  elements  or  through  wear  and  tear  incident  to  the  industry 
are  termed  wasting  assets.  Evidently  they  will  vary  in  character 
with  the  character  of  the  business,  and  a  careful  investigation 
should  be  made  of  every  undertaking  to  determine  just  what 
wasting  assets  it  includes  in  order  that  proper  allowance  can  be 
made  for  them  by  setting  aside  money  from  revenue  sufficient 
to  keep  the  capital  account  intact. 

A  careful  distinction  must  sometimes  be  made  between  the 
several  ways  in  which  assets  may  lessen  in  value.  In  the  case 
of  the  appraisal  of  a  public  utility  enterprise  as,  for  instance,  a 
street  car  system  or  a  telephone  system,  where  toll  rates  are  to 
be  fixed  upon  the  basis  of  the  valuation,  the  following  forms  of 
lessening  value  may  be,  and  often  are,  recognized: 

(1)  Wear  and  tear  or  maintenance. 

(2)  Physical  decay  or  decrepitude. 

(3)  Deferred  maintenance  or  neglect. 

(4)  Inadequacy. 

(5)  Obsolescence. 

85.  Wear  and  Tear  or  Maintenance.  From  the  moment  a 
building  is  erected  or  a  machine  is  put  into  service  deterioration 
begins  because  of  the  action  of  the  elements  or  the  use  of  the 


THE  DEPRECIATION  OF   WASTING  ASSETS     141 

building  or  machine.  Thus,  the  bearings  of  all  machines  wear 
more  or  less,  the  paint  on  the  building  begins  at  once  to  wear 
off,  the  commutator  of  a  dynamo  must  be  replaced  or  a  new  tire 
must  be  put  upon  a  wagon  wheel.  Deterioration  of  this  kind, 
that  can  be  compensated  for  by  proper  repairs  and  renewals, 
is  usually  known  as  wear  and  tear.  Depreciation  of  this  sort 
varies  greatly  in  its  effect  with  different  classes  of  apparatus. 
In  some  cases  the  effect  is  very  great  in  the  beginning  of  the  life 
of  the  asset,  slowing  up  as  time  goes  on;  while  in  other  cases  the 
reverse  may  take  place,  the  deterioration  because  of  wear  and 
tear  becoming  greater  in  effect  as  the  end  of  the  working  life  of 
the  asset  approaches.  In  this  class  of  depreciation  may  also  be 
included  the  results  of  accidents  or  sudden  damage  from  un- 
foreseen causes,  and  when  these  are  abnormally  great  they  should 
be  charged  off  over  a  considerable  length  of  time  so  as  not  to 
augment  the  current  operating  expenses  excessively.  (See  Art. 
74.)  It  is  customary,  in  most  plants,  to  charge  the  expense  of 
compensating  for  wear  and  tear,  which  is  the  most  apparent 
form  of  depreciation,  to  operating  expense,  thus  making  it  a 
direct  charge  against  production. 

86.  Physical  Decay  or  Decrepitude.  Even  when  a  machine 
is  kept  in  first-class  repair,  or  when  a  building  is  kept  prop- 
erly painted  and  repaired  there  is  a  general  deterioration  that 
goes  on  continually  that  cannot  be  thus  compensated  for,  and 
in  time,  the  structure  or  machine  will  reach  such  a  state  that 
nothing  short  of  complete  renewal  will  suffice.  In  many  cases 
this  gradual  lessening  of  value  by  age  will  be  the  same  or  even 
greater  whether  the  asset  is  used  or  not.  Buildings,  boilers, 
insulated  wire  and  similar  assets  will  waste  away  by  the  action 
of  the  elements  as  rapidly  when  standing  idle  as  when  in  opera- 
tion, and  it  is  common  experience  that  such  properties,  in  time, 
reach  a  state  of  decay  where  repairs  are  no  longer  economical. 
Such  deterioration  is  called  decrepitude  or  physical  decay.  A 
horse  is  a  most  excellent  example  of  this  form  of  depreciation. 
His  shoes  can  be  kept  repaired  but  the  gradual  breaking  down 
of  his  physical  powers  cannot  be  stayed  by  any  manner  of  re- 
pairs or  renewals.  He  must  be  replaced. 


142    PRINCIPLES   OF   INDUSTRIAL   ORGANIZATION 

87.  Deferred   Maintenance.     It  is  clear   that   even  though 
repairs    and    maintenance    are    properly  provided  all  physical 
assets  will,  in  course  of  time,  depreciate  below  their  original 
value  even  though  their  productive  powers  are  as  high  as  in  the 
beginning.     In  fact,  after  a  few  years  it  is  probable  that,  even 
with  the  best  of  maintenance,  a  plant  of  any  kind  cannot  be 
put  in  a  condition  that  will  exceed  85  per  cent  of  its  original 
value.     If,  however,  the  proper  repairs  and  maintenance  are 
not  provided  the  value  of  the  asset  will  fall  below  the  value  it 
should  have,  if  properly  maintained,  and  the  amount  it  may  fall 
is  known  as  deferred  maintenance  or  neglect.     Deferred  main- 
tenance is  a  measure  of  the  amount  that  must  be  expended  to 
restore  the  asset  to  normal  working  condition  and  is,  therefore, 
a  measure  of  the  efficiency  of  the  management  or  its  financial 
ability.     This  form  of  depreciation  is  obviously  important  in 
appraisal  work  where  interests  other  than  those  of  the  manage- 
ment are  concerned. 

88.  Inadequacy.     Even  though  the  asset  may  be  kept  in  full 
repair  it  may  become  uneconomical  or  even  useless  because  of 
increased  demands  of  the  service,  though  it  may  still  be  fully 
adequate  to  do  the  work  for  which  it  was  installed.     Thus  an 
engine  may  become  too  small  for  the  work  required,  or  street  cars 
may  become  too  small  to  be  economical  for  the  increased  ser- 
vice demanded.     If  heavier  cars  are  installed  they  will  make 
heavier  rails  necessary,  though  the  old  rails  may  not  be  worn. 
An  overhead  crane  may  be  in  good  repair  and  of  modern  type, 
but  may  be  found  inadequate  to  meet  the  requirements  due  to 
growth.     This  kind  of  decreased  value  is  called  inadequacy,  or 
supersession.     It  clearly  has  no  connection  with  age  or  time 
of  service  or  the  physical  condition  of  the  asset  so  far  as  wear 
and  tear  is  concerned. 

89.  Obsolescence.     Assets   may    become    of    lessened   value 
because  of  the  introduction  of  new  types  of  apparatus  or  new 
inventions  or  processes.     This  is  particularly  true  in  any  in- 
dustry or  business  that  is  developing  rapidly.     Thus,  in  the 
development  of  the  textile  industries  of  New  England  a  heavy 
burden  was  imposed  upon  manufacturers  because  of  the  rapid 


THE  DEPRECIATION  OF   WASTING  ASSETS     143 

development  of  new  machines,  that  gave  a  great  advantage  to 
other  men  seeking  an  opening  in  the  field  and  compelled  the 
older  owners  to  scrap  their  machinery  long  before  wear  and  tear 
had  become  noticeable.  The  same  effects  were  very  common 
in  the  electrical  field  during  the  early  periods  of  development 
and  still  prevail,  in  fact,  in  many  lines  of  that  industry.  The 
history  of  street  car  traction  is  a  remarkable  instance  of  the 
effect  of  obsolescence.  The  change  from  horse  cars  to  cable 
cars,  from  cable  cars  to  electrical  propulsion  and  the  very  rapid 
growth  of  this  last  system  has  been  marked  by  the  abandon- 
ment of  much  apparatus  long  before  wear  or  decrepitude  would 
have  compelled  such  a  step.  Such  depreciation  is  called  obso- 
lescence. It  is  very  similar  to  inadequacy  in  its  effect  but  pro- 
ceeds from  different  causes.  Machinery  or  other  assets  thrown 
out  of  use  by  reason  of  inadequacy  may  still  have  a  high  market 
value;  but  machinery  abandoned  because  of  obsolescence  is,  in 
most  cases,  valueless  except  for  scrap  since,  here,  the  economic 
use  of  the  asset  is  destroyed  regardless  of  its  size.  Inadequate 
machinery  may  be  of  good  service  in  some  other  place  or  under 
other  conditions. 

As  before  noted  any  or  all  of  these  forms  of  lessening  value 
may  be  important  in  appraising  properties  where  conflicting 
interests  are  concerned,  as  in  the  valuation  of  railways  or  other 
quasi-public  enterprises,  or  in  differences  of  opinion  between 
stockholders  and  bondholders.  In  the  case  of  simple  depre- 
ciation of  factories,  where  the  owner  is  desirous  only  of  knowing 
the  total  of  such  losses,  these  several  classes  of  wasting  losses 
may  be,  and  usually  are,  grouped  under  two  heads,  namely, 
depreciation,  which  includes  the  effects  of  wear  and  tear,  de- 
crepitude and  deferred  maintenance,  and  obsolescence,  which 
includes  inadequacy  also.  The  effect  of  the  first  group  included 
in  depreciation  can,  obviously,  be  estimated  by  observation, 
or  if  data  are  available  some  systematic  method  of  compen- 
sating for  these  effects  can  be  adopted.  Obsolescence,  how- 
ever, cannot  always  be  adjudged  visually,  but  it  is  possible  often 
to  make  estimates  on  the  probable  life  of  the  asset  at  the 
end  of  which  it  will  be  obsolete.  A  discussion  of  the  methods 


144     PRINCIPLES   OF   INDUSTRIAL   ORGANIZATION 

of  providing  for  these  losses  will  be  given  in  a  succeeding 
article. 

90.  Relation  of  Depreciation  to  Capital.  Many  undertakings 
must  face  what  may  be  termed  obligations.  Thus,  money  may 
have  been  borrowed,  payable  at  a  definite  future  time.  Ma- 
chinery may  be  installed  in  a  rented  factory  under  the  agreement 
that  it  becomes  the  property  of  the  landlord  after  a  given  fixed 
time;  or  valuable  patents  may  have  been  acquired  whose  value 
is  comparatively  short-lived.  To  meet  these  obligations  an 
annual  sum  may  be  set  aside  from  revenue,  thus  forming  a  sink- 
ing fund  that,  under  compound  interest,  will  accrue  to  the  de- 
sired amount  at  the  expiration  of  the  allotted  time. 

The  importance  that  should  be  attached  to  distinguishing 
between  sums  of  money  set  aside  out  of  revenue  for  specific 
purposes  will,  clearly,  depend  on  the  nature  of  the  business  and 
the  manner  in  which  it  is  owned  and  operated.  Sometimes 
neither  reserve  fund  nor  sinking  fund  is  necessary,  but  allow- 
ance must  nearly  always  be  made  for  depreciation  and  obso- 
lescence and  care  should  be  taken,  if  only  one  fund  is  set  aside, 
that  it  shall  be  sufficient  to  cover  not  only  the  specific  purpose 
for  which  it  may  be  intended  but  for  depreciation  and  obsoles- 
cence as  well,  if  these  are  not  cared  for  in  some  other  manner. 
In  general,  the  larger  the  undertaking  the  more  important  is  it 
that  these  accounts  be  segregated,  while  in  small  plants  pro- 
vision for  wear  and  tear,  obsolescence  and  other  contingencies  is 
often  made  under  the  one  head  of  allowance  for  depreciation,  thus 
greatly  broadening  the  significance  of  the  term.  In  large  un- 
dertakings, on  the  other  hand,  the  conflicting  interests  of  stock- 
holders and  bondholders  may  make  it  undesirable  to  establish 
large  reserves  for  unforseen  contingencies,  as  it  is  difficult,  often, 
to  convince  stockholders  of  the  necessity  of  such  funds  which 
they  would  prefer*  to  see  distributed  in  dividends.  For  this 
reason  reserves  are  often  hidden  under  the  general  name  of  de- 
preciation though  the  practice  can  scarcely  be  commended. 

The  capital  investment  of  practically  all  industrial  enter- 
prises includes  some  wasting  assets;  and  it  is  evident  that  they 
should  be  carefully  considered.  These  wasting  losses  are  in 


THE  DEPRECIATION   OF   WASTING  ASSETS     145 

reality  a  charge  against  production  and  the  fact  that  they  do 
not  make  themselves  known  through  the  payroll,  the  material 
requisitions,  or  bills  payable  renders  them  all  the  more  elusive 
and  dangerous.  Suppose,  for  instance,  that  an  enterprise  is 
started  with  $100,000  total  assets,  divided  into  $60,000  fixed 
assets,  $25,000  worth  of  material  in  process,  and  $15,000  cash. 
Suppose  that  at  the  end  of  ten  years  the  owner  has  disbursed 
$20,000  in  profits,  but  on  taking  a  careful  inventory  he  finds  his 
fixed  assets  to  be  worth  only  $30,000,  his  material  in  process  to 
be  worth  $20,000  and  his  cash  to  be  $10,000  or  a  total  of  $60,000. 
Clearly,  his  apparent  profit  of  $20,000  has  been  made  at  the 
cost  of  a  loss  of  $40,000  from  his  capital;1  in  fact,  his  apparent 
profits  were  taken  out  of  capital.  The  following  basic  rule  may, 
therefore,  be  stated:  no  profits  should  be  declared  until  all 
losses  to  capital  through  the  revenue  account  have  been  replaced 
from  revenue. 

'This  principle  is  even  more  clear  in  considering  undertakings 
that  are  limited  in  extent  or  time.  Thus,  in  the  case  of^a  man 
who  acquires  a  piece  of  coal  land  and  sinks  a  shaft  for  the  pur- 
pose of  taking  out  the  coal,  his  investment  is  represented  by  the 
purchase  price  of  the  land  and  the  cost  of  his  shaft  and  equip- 
ment, with  such  cash,  etc.,  as  may  be  necessary  for  operation. 
When  the  coal  has  been  removed  the  land  and  machinery  may 
be  valueless,  or  nearly  so,  depreciating  yearly  as  he  removes  the 
coal.  Clearly,  he  must  sell  the  coal  at  a  price  that  will  return 
him  his  original  investment  plus  the  cost  of  operating,  plus  such 
a  profit  as  he  may  expect  to  make  on  his  investment.  Goodwill, 
patent  rights  and  similar  investments,  that  depreciate  with 
time,  are  of  the  same  character  and  must,  in  general,  be  returned 
to  capital  out  of  revenue  before  they  expire;  and  profits  cannot 
be  said  to  have  been  made  till  all  such  wastes  have  been  re- 
turned to  capital. 

The  relation  that  depreciation  bears  to  assets  and  profits  is 
not  always  easy  to  see.  Floating  assets  such  as  cash,  bills  re- 
ceivable and  materials  in  process  can  be  readily  evaluated  and, 
usually,  the  books  of  any  concern  give  minute  details  of  these 
1  It  is  assumed  that  he  has  no  liabilities  in  either  case. 


146    PRINCIPLES   OF   INDUSTRIAL   ORGANIZATION 

accounts.  But  the  actual  changes  that  have  taken  place  in  the 
value  of  buildings  and  equipment  are  seldom  accurately  known, 
first  because  it  is  (as  will  be  seen)  difficult  to  evaluate  these 
changes,  and  second  because,  as  noted,  these  changes  in  value 
do  not  force  themselves  upon  the  attention  of  the  accountant 
as  do  other  items  of  manufacturing  expense.  Nevertheless, 
this  fundamental  relation  is  clear,  that  it  is  not  safe  to  declare 
profits1  of  any  kind  till  assured  that  all  wastes  of  the  assets 
have  been  replaced.  It  may  be  noted  here  that  the  care  that 
will  be  exercised  in  enforcing  this  important  principle  often 
depends  on  the  character  of  the  parties  owning  the  industry. 
To  the  individual  owner,  or  to  simple  partners,  the  above  rea- 
soning will  appear  sound  and  will  usually  be  followed  as  far  as 
possible  or  desirable.  When,  however,  the  business  is  owned 
by  a  corporation  of  stockholders,  and  has  issued  bonds  that  are 
held  by  so-called  bondholders,  there  is  a  diversity  of  interest 
that  may  affect  the  rate  of  depreciation  greatly.  The  bond- 
holder does  not  run  the  business  and  has  no  vote  in  its  manage- 
ment but  simply  loans  money  to  the  corporation,  taking  a  bond 
as  security  and  receiving  interest  on  his  loan,  usually  at  a  fixed 
rate.  Evidently  his  bond  is  secured  only  so  long  as  the  assets 
that  it  represents  remain  unimpaired  and  hence  he  will  most 
naturally  want  to  see  depreciation  of  all  wasting  assets  fully 
restored,  even  though  no  dividends  are  paid  beyond  the  interest 
on  the  bonds,  which  have  first  call  on  any  payments.  The 
shareholders  or  apparent  owners  of  the  industry,  however,  are 
interested  more  in  the  profits  of  the  business.  They  may  be, 
and  often  are,  a  continually  changing  body  and  would  not,  in 
general,  be  concerned  if  profits  were  paid  out  of  capital,  because 
of  inadequate  allowance  for  depreciation.  Unless,  therefore, 
the  officers  of  such  a  corporation  do  make  proper  allowance 
for  depreciation  before  declaring  profits  they  are  not  dealing 
fairly  with  the  bondholders  who  are  their  creditors.  It  is  to 

1  The  term  profit  here  is  used  in  a  general  sense  meaning  any  surplus  in 
the  trading  account  after  wasting  capital  losses  have  been  replaced.  Strictly 
speaking,  however,  profit  is  any  surplus  left  after  interest  on  capital  investment 
has  been  allowed.  (See  article  66.) 


THE  DEPRECIATION   OF   WASTING   ASSETS     147 

be  noted  that  excess  allowance  for  depreciation  usually  does  no 
injury  to  either  bondholders  or  stockholders  since  it  serves  only 
to  make  the  stockholders'  security  more  secure  and  leaves  a 
surplus  in  the  hands  of  the  stockholders  for  administration. 
However,  as  will  be  seen  later,  there  are  limitations  also  to 
this  procedure. 

This  divergency  of  interest  often  occurs  where  a  building  or 
factory  is  rented  by  the  manufacturer.  The  owner  is  inter- 
ested in  obtaining  his  fixed  rental,  and  also  in  seeing  that  the 
plant  is  kept  in  thorough  repair.  The  tenant  is  interested  in 
upkeep  only  so  far  as  it  affects  his  profits.  A  written  agree- 
ment is  essential  in  such  cases  as  this  divergent  point  of  view  is 
often  the  cause  of  legal  action. 

91.  Relation  between  Depreciation  and  Repairs  and  Re- 
newals. Expenditures  made  for  repairs  and  maintenance  tend, 
naturally,  to  offset  depreciation  due  to  wear  and  tear,  but  it  is 
only  in  certain  cases  that  they  may  be  considered  as  completely 
balancing  depreciation  losses.  Where  the  plant  consists  of  a 
large  number  of  units  that  wear  out  so  quickly  as  to  need  frequent 
renewals  the  very  fact  that  it  is  in  full  working  order  is  sufficient 
proof  that  depreciation  is  fairly  compensated  for.  Again,  in 
very  large  and  permanent  undertakings,  such  as  railroads,  where 
a  large  amount  of  repairs,  renewals  and  additions  are  constantly 
under  way,  it  is  often  assumed  that  depreciation  is  thus  fully 
compensated  for.  Evidently  there  should  be  an  obvious  in- 
crease in  the  plant  yearly  to  insure  that  such  is  the  case,  or  other- 
wise there  is  danger  that  a  gradual  lessening  of  value  may  really 
be  taking  place.  For,  in  general,  it  cannot  be  assumed  that 
the  ordinary  running  repairs  and  renewals  compensate  for  de- 
preciation. A  machine  or  building  may  be  kept  in  prime  repair 
and  worn  parts  may  be  replaced  from  time  to  time;  but  in  spite 
of  the  best  of  care,  there  is,  and  must  be,  a  general  wearing  out  of 
the  asset  till  nothing  short  of  complete  renewal  can  be  considered. 

It  is,  of  course,  true  that  extensive  repairs  may,  in  some  cases, 
be  considered  as  offsetting  a  certain  amount  of  depreciation, 
but  such  allowances  should  be  made  with  care.  In  a  similar 
manner  some  renewals  may  be  considered  as  additions  to  capital. 


148     PRINCIPLES   OF   INDUSTRIAL   ORGANIZATION 

Thus,  suppose  a  boring  mill  that  was  originally  worth  $10,000 
is  sold  to  a  second-hand  dealer  for  $2000  and  a  new  mill  bought 
for  $20,000,  being  paid  for  by  the  $2000  from  the  sale  of  the  old 
mill  and  $18,000  taken  from  earnings.  Clearly,  it  would  be  fair 
to  make  an  addition  to  the  capital  account  of  $10,000  provided, 
of  course,  that  the  earning  power  of  the  new  mill  was  greater 
than  the  old  one  in  proportion  to  the  difference  in  price.  By 
similar  reasoning  it  can  be  seen  that  renewals  may  just  balance 
depreciation;  but  care  should  be  taken  that  such  renewals  are 
not  considered  as  additions  to  capital  unless  they  really  increase 
the  earning  capacity  of  the  plant.  In  fact,  new  additions  to  the 
plant  should  not  be  considered  as  additions  to  capital  unless  it 
is  clear  that  they  increase  the  earning  power,  and  also  that  the 
investment  in  the  additions  is  not  compensated  for  by  the  de- 
terioration of  the  older  part  of  the  plant,  for  which  no  provision 
has  been  made  in  the  form  of  a  reserve  fund. 

92.  Methods  of  Depreciation.  From  the  foregoing  it  will  be 
clear  that  the  object  of  computing  depreciation  is  to  make  sure 
that  all  deterioration  of  the  wasting  assets  is  fully  restored  before 
any  profits  are  declared.  The  value  of  the  continuous  and  un- 
avoidable wastes  in  the  plant  are  taken  from  revenue  and  trans- 
ferred to  the  floating  assets  in  the  form  of  cash  or  some  other 
floating  asset  and  if  the  computation  for  depreciation  is  correctly 
made  the  total  assets  will  remain  constant1  in  value.  The  funds 
so  set  aside  from  revenue  may  be  employed  in  the  business  in 
other  ways,  or  they  may  be  placed  at  interest,  if  not  needed  in 
the  business,  thus  forming  a  reserve  fund  that  may  be  drawn 
upon  for  renewals  or  repairs  of  such  a  character  as  may  be 
justifiable. 

While  the  necessity  of  making  allowance  for  depreciation  is 
generally  admitted,  there  is  little  unanimity  of  opinion  as  to  the 
methods  to  be  pursued  in  making  such  an  allowance.  This  is 
naturally  so  since  industrial  enterprises  differ  widely,  and  besides, 
what  may  be  desirable  may  not  always  be  expedient.  There  is 

1  Of  course  additions  may  be  made  to  capital  from  some  outside  source 
or  by  adding  to  it  from  the  profits,  but  this  does  not  affect  the  above  principle 
so  far  as  the  original  capital  is  concerned. 


THE  DEPRECIATION   OF   WASTING  ASSETS     149 

often,  however,  too  great  a  lack  of  knowledge  of  the  fundamental 
principles  involved  and  systematic  methods  of  providing  for 
depreciation  are  the  exception  and  not  the  rule.  Some  man- 
agers are  content  to  consider  the  amount  spent  from  revenue 
for  additions,  repairs  and  renewals  as  sufficient  to  compensate 
for  depreciation.  The  limitations  of  this  procedure  have  already 
been  discussed.  Others  are  content  to  take  the  difference  be- 
tween an  estimated  percentage  of  depreciation  and  the  cost  of 
repairs  and  renewals  as  a  measure  of  the  depreciation;  but  such 
rules  are  of  a  necessity  rough  approximations.  Probably  the 
most  common  way  of  ascertaining  depreciation  is  to  take  an 
inventory  of  all  assets,  visual  examination  being  made  of  each 
and  every  tool  and  appliance,  and  the  apparent  value  noted. 
The  sum  of  the  values  thus  found  is  the  apparent  valuation  of 
the  plant,  and  by  comparison  with  former  records  the  depre- 
ciation may  be  determined.  This  would  seem  to  be  the  most 
practical  and  satisfactory  method,  particularly  where  the  books 
of  the  concern  are  closed  at  stated  periods,  say  annually,  and  a 
balance  made  of  all  accounts.  There  are  some  disadvantages, 
however,  in  this  method,  because  of  the  large  amount  of  time, 
trouble  and  expense  involved,  especially  if  the  plant  is  a  large 
one;  and  in  very  busy  seasons  it  may  be  very  undesirable  to 
take  such  an  inventory,  particularly  if  it  involves  a  suspension 
of  work.  Moreover,  a  visual  examination  of  a  machine  may,  or 
may  not,  give  a  correct  estimate  of  its  real  value.  A  machine 
several  years  old  may  appear  to  be  in  first-class  order,  yet,  never- 
theless, its  working  life  shortens  yearly  and  due  provision  should 
be  made  against  the  time  when  it  must  be  replaced  or  is  rendered 
obsolete.  It  requires  rare  judgment  and  great  experience  to 
estimate  accurately  plant  values  visually.  A  periodical  survey 
of  the  whole  plant  is,  however,  a  very  valuable  and  necessary 
proceeding,  as  it  may  serve  as  a  check  upon  any  systematic 
method  of  computing  depreciation. 

Some  care  must  be  exercised  in  placing  a  valuation  on  any 
industrial  property  since  the  purpose  of  such  a  valuation  is  to 
show  what  it  is  worth  as  an  asset.  Equipment  may  have  sev- 
eral values  depending  on  how  it  is  viewed.  There  is  a  great 


150    PRINCIPLES   OF   INDUSTRIAL   ORGANIZATION 

difference  in  the  value  of  a  plant  as  a  going  concern  to  its  own- 
ers, and  the  value  of  the  same  plant  to  a  purchaser  if  it  is  disposed 
of  at  forced  sale  to  satisfy  obligations.  Every  tool  depreciates 
considerably  in  market  value  the  very  first  time  it  is  used,  though 
its  intrinsic  worth  may  not  change.  It  would  not  seem  fair, 
however,  to  evaluate  such  property  at  the  lowest  price,  namely, 
forced  sale  value,  so  long  as  the  concern  is  a  going  one,  unless  the 
business  is  exceedingly  profitable  and  the  owners  can  afford  to 
carry  the  value  of  the  plant  at  a  sum  that  is  on  the  extreme  side 
of  safety. 

In  appraising  1  public  utilities  several  kinds  of  value  may  be, 
and  often  are,  recognized.  Thus  the  service  value  or  the  value 
of  the  asset  as  measured  by  its  present  effectiveness  for  the  pur- 
pose for  which  it  was  installed,  may  be  important  in  such  cases. 
This  may  be  high,  though  the  property  may  be  considerably 
depreciated,  theoretically.  Another  basis  for  valuation  of  util- 
ities and  one  that  has  been  approved  by  the  courts  of  some  states 
is  the  cost  of  reproduction,  of  the  asset  considered,  with  new 
apparatus  of  the  same  kind  and  efficiency,  at  the  current  market 
prices. 

If  from  the  original  cost,  if  it  be  known,  or  from  the  estimated 
cost  of  reproduction  new,  there  be  taken  the  total  depreciation, 
the  so-called  present  value  is  obtained.  This  is  the  value  that 
is  most  used  in  evaluating  factory  assets  for  inventory  purposes 
and  which  will  be  discussed  more  fully  later. 

In  making  an  evaluation  of  any  asset,  care  should  be  used  to 
separate  recoverable  values  from  those  that  are  irrecoverable. 
The  total  cost  of  a  machine  is  its  purchase  price  plus  freight, 
cartage  and  cost  of  installation,  including  the  foundation.  A 
machine  does  not  change  in  value  if  moved  from  one  position 
in  the  shop  to  another,  but  the  outlay  incident  to  erecting  it  in 
the  original  location  vanishes  the  moment  it  is  moved,  and  can- 
not be  regarded  as  recoverable  in  any  sense.  In  fact,  it  may  be 
an  expensive  matter  to  remove  or  remodel  the  old  foundation 
to  make  the  site  available  for  other  operations.  Such  items  of 
expenditure,  therefore,  should  not  be  included  in  the  inventory 
1  See  Valuation  of  Public  Utility  Properties,  by  Henry  Floy,  p.  13. 


THE  DEPRECIATION  OF   WASTING  ASSETS     151 

value  of  the  machine,  but  should  be  charged  to  a  preliminary 
expense  account  and  written  off  independently  and  as  quickly 
as  possible  by  depreciation  methods. 

In  addition  to  the  physical  assets  that  are  tangible,  that  is, 
assets  that  are  visible,  there  are  usually  other  items  that  are 
intangible  and  invisible,  that  are,  nevertheless,  assets  in  a  true 
sense.  In  this  class  would  be  listed  all  development  expense 
such  as  engineers'  surveys,  legal  expenses  of  organization,  cost 
of  franchises  or  permits,  salaries  and  all  other  expenses  incident 
to,  and  chargeable  against,  construction,  and  similar  expenditures 
that  are  a  part  of  the  cost  of  the  plant  but  do  not  show  as  visible 
or  tangible  property  in  the  inventory.  Such  expenses  are  a  true 
part  of  the  cost  of  the  plant  but  are  not  easy  to  recover  if  the 
plant  is  sold.  Best  practice  carries  all  such  expenses  in  a  sepa- 
rate development  account  and  makes  provision  to  depreciate 
it  out  of  existence  by  means  of  sinking  fund  methods  to  be  de- 
scribed later.  Intangible  assets,  such  as  cost  of  franchises, 
patents  and  short-lived  assets,  in  general,  that  are  not  a  part  of 
construction  expense  should  also  be  carefully  segregated  and 
provision  made  for  writing  them  off  as  quickly  as  possible. 

From  the  foregoing  it  will  be  clear  that  there  is  a  difference 
in  the  valuation  that  should  be  placed  upon  an  asset  depending 
on  the  purpose  for  which  the  valuation  is  made.  Setting  aside 
the  modifying  influences  that  arise  in  making  such  valuations 
of  property  for  the  purpose  of  fixing  rates  for  public  service  and 
similar  cases,  it  is  clear  that  for  the  usual  purposes  of  inventory 
this  value  will  lie  between  the  original  or  cost  value  and  the 
ultimate  or  scrap  value  of  the  machine.  The  rate  at  which  the 
value  of  the  asset  will  fall  from  the  original  value  to  scrap  value 
will  depend  on  several  factors  and  may  vary  with  changing  cir- 
cumstances. It  is  customary  in  most  well-operated  plants  to 
establish  average  rates  of  depreciation,  these  rates  varying  with 
the  character  of  the  plant,  so  that  each  asset  or  class  of  assets 
can  be  depreciated  yearly  without  much  trouble,  and  to  check 
the  results  by  partial  or  complete  visual  examination  at  longer 
periods.  These  depreciation  rates  may  be  adjusted  from  time 
to  time  as  variations  in  the  business  or  extensive  repairs  and 


152     PRINCIPLES   OF   INDUSTRIAL   ORGANIZATION 

renewals  make  it  necessary  or  desirable.     The  three  principal 
factors  involved  in  establishing  such  rates  are: 

(1)  The  first  cost  of  the  asset,  whether  building  or  machine. 

(2)  The  estimated  productive  life  of  the  asset. 

(3)  The  residual  or  scrap  value  of  the  building  or  machine. 
The  two  factors  that  tend  most  to  modify  any  systematic 

scheme  of  depreciation  are: 

(1)  Extensive  repairs  or  renewals. 

(2)  Obsolescence1  of  the  asset  due  to  change  in  productive 
methods  or  the  introduction  of  new  machines  or  processes. 

To  illustrate,  suppose  that  a  milling  machine  is  purchased  for 
$3000,  the  estimated  producing  life  of  which  is  10  years.  Sup- 
pose, further,  that  it  is  estimated  that  the  residual  or  scrap  value 
of  the  machine  is  placed  at  $600.  The  total  depreciation,  ex- 
cluding modifying  circumstances,  is  $3000  -  $600  =  $2400;  and 
this  must  be  distributed  over  the  life  time  of  the  machine,  or  10 
years,  by  some  systematic  method.  Suppose  that  by  the  sys- 
tematic method  adopted  the  book  value  of  the  machine  has  been 
reduced  to  $1000  at  the  end  of  four  years,  and  at  that  time  the 
machine  is  thoroughly  repaired  and  put  into  first-class  condition, 
these  repairs  costing  $1000.  If  the  design  and  producing  power 
of  the  machine  still  compare  favorably  with  new  tools  of  the 
same  kind  it  is  clear  that  because  of  these  thorough  repairs  the 
book  value  of  $1000  can  be  increased  to,  say,  $1500  and  the  rate 
of  depreciation  readjusted.  On  the  other  hand,  the  machine 
may  at  the  end,  say,  of  the  third  year  be  found  in  first-class 
condition,  but  be  almost  valueless  because  of  changes  in  manu- 
facturing processes  or  because  of  new  inventions.  Special  tools 
are  much  more  likely  to  be  thus  affected  than  are  those  of  stand- 
ard design  and  type. 

The  probable  life  of  any  machine,  or  building,  varies  with 
the  industry  and  class  and  character  of  the  equipment.  Care 
and  character  of  service,  and  the  hours  of  actual  use  also  con- 
tribute to  this  variation.  For  this  reason,  while  it  is  necessary 
to  assume  a  working  life  in  arranging  a  system  of  depreciation, 

1  There  may  be  cases  where  changes  in  processes  may  cause  machines  to 
appreciate  in  value,  but  such  cases  are  rare.  Land  often  appreciates  in  value. 


THE  DEPRECIATION  OF   WASTING  ASSETS     153 

the  inventory  values  as  given  by  any  system  should  be  checked 
occasionally  by  actual  examination,  particularly  where  obso- 
lescence is  possible. 

The  ultimate  selling  value  of  any  machine  will,  obviously, 
depend  on  many  factors,  and  must,  in  general,  be  estimated.  In 
the  extreme  case,  the  ultimate  value  will  be  the  value  of  the 
machine  as  scrap  and  this,  again,  would  depend  on  the  materials 
of  which  it  is  made  and  the  difficulty  of  reworking  them.  Thus 
small,  complicated  apparatus,  composed  of  various  materials 
as  steel,  cast  iron  and  brass,  are  often  costly  to  dismember; 
while  very  large  and  thick  castings  are  expensive  to  break  up. 

The  rate  at  which  the  asset  shall  be  depreciated  from  the 
original  cost  to  scrap  value  over  the  assumed  life  requires  spe- 
cial consideration.  The  assumed  rate  will  lie,  in  general,  between 
two  extremes.  If  the  asset  has  been  kept  in  first-class  repair 
and  has  not  suffered  from  obsolescence,  its  value  for  the  purpose 
for  which  it  was  installed  may  decrease  very  slowly  for  a  long 
time,  actual  depreciation  becoming  very  rapid  only  near  the 
end  of  its  productive  life.  To  carry  any  wasting  asset  at  a  high 
valuation  for  a  long  period  of  time  is,  however,  courting  disaster, 
if  there  is  any  danger  whatever  of  any  readjustment  of  the  busi- 
ness that  would  involve  an  appraisal  of  the  property,  particu- 
larly if  such  readjustment  resulted  in  a  forced  sale;  and  most 
prudent  managers  carry  the  value  of  their  plant  on  their  books 
at  a  constantly  decreasing  value  to  guard  against  such  a  con- 
tingency. 

The  market  or  commercial  value  of  a  machine,  on  the  other 
hand,  falls  very  rapidly  during  the  first  part  of  its  life  though 
its  producing  power,  and  value  as  a  going  asset  may  not  decrease. 
As  before  noted  it  would  be  obviously  unfair  to  depreciate  sud- 
denly all  new  assets  during  the  first  years  of  their  life  and  in 
the  case  of  new  enterprises  such  a  procedure  would  often  render 
profits  and  progress  impossible.  Thus  a  special  machine  might 
be  a  very  valuable  and  profitable  investment  to  a  going  concern, 
but  would  be  worth  scrap  value  only,  at  a  forced  sale,  the  day 
after  it  was  built.  For  these  reasons  the  rates  of  depreciation 
usually  adopted  lie  between  these  two  extremes,  thus  compro- 


154    PRINCIPLES   OF   INDUSTRIAL   ORGANIZATION 

mising  the  advantages  and  defects  of  both,  the  rates  being  selected 
so  as  to  lean  toward  either  extreme,  as  desired,  depending  on 
the  character  of  the  asset  under  consideration. 

Thus,  referring  to  Fig.  14,  suppose  a  milling  machine  that  cost 
$3000  is  to  be  depreciated  to  a  sales  value  of  $600  in  ten  years. 
If  it  be  desired  to  depreciate  the  asset  very  rapidly  so  as  to  reduce 


FIG.  14. 

it  quickly  to  forced  sale  value  the  depreciated  value  would  lie 
along  some  such  curve  as  AED,  dropping  rapidly  in  the  early 
years  and  more  slowly  in  the  later  years.  If,  however,  the  in- 
ventory was  to  be  based  upon  the  service  value  and  the  asset  was 
kept  in  good  repair,  the  depreciated  values  would  lie  along  some 
such  curve  as  ABD,  falling  very  slowly  at  first,  but  dropping 
very  rapidly  as  the  machine  neared  the  end  of  its  productive 


THE  DEPRECIATION  OF  WASTING  ASSETS     155 

life.  Obviously,  an  infinite  number  of  curves  could  be  drawn 
between  these  extremes  depending  on  the  circumstances  and  the 
judgment  of  the  appraiser.  In  practice,  however,  it  is  cus- 
tomary, for  convenience,  to  adopt  some  systematic  mathematical 
method  for  progressively  lowering  the  value  of  the  asset,  the 
most  important  of  these  methods  being  the  percentage-on- 
original-cost  plan,  the  percentage  on  diminishing-value  plan 
and  the  sinking-fund  plan. 

Under  the  percentage-on-original-cost  method  the  total  depre- 
ciation, that  is,  the  difference  between  the  cost  and  the  scrap 
values,  is  divided  by  the  estimated  producing  life,  and  an  amount 
equal  to  the  dividend  is  deducted  from  the  value  of  the  asset 
annually.  Thus,  in  the  above  example,  the  annual  deprecia- 


- 
tion  of  the  milling  machine  would  be  -  —  =  $240,  and 

the  depreciated  values  of  the  machine  would  lie  along  the  straight 
line  AD  Fig.  14;  hence  the  name  straight-line  method  some- 
times applied  to  this  plan  of  depreciation.  Because  of  its  sim- 
plicity and  because  it  gives  a  fair  compromise  between  the 
conflicting  difficulties  discussed,  this  method  of  depreciation  is 
used  more,  perhaps,  than  any  other. 

An  argument  in  favor  of  the  above  method  is  that  in  a  new 
business,  with  scanty  income  during  the  early  years,  it  does  not 
make  such  a  heavy  demand  on  income  as  other  methods  to  be 
described.  An  argument  against  the  above  method  is  that  de- 
preciation really  is  much  greater  in  the  early  years  of  an  asset 
than  in  the  later  periods.  Undoubtedly,  the  diminution  in 
value  of  a  machine  tool  is  much  greater  during  the  first  or  second 
year  of  its  life  than  during  the  tenth  or  fifteenth.  Another  ar- 
gument against  the  system  is  that  it  is  often  more  desirable  to 
depreciate  heavily  during  the  early  years  when  repairs  and  re- 
newals are  not  costly,  and  to  deduct  less  during  the  later  years 
when  repairs  and  renewals  begin  to  be  more  burdensome,  thus 
keeping  the  annual  deduction  from  revenue  fairly  constant. 

For  these  and  other  reasons  some  managers  prefer  the  percent- 
age-on-diminishing-value  method.  Under  this  method  a  fixed 
percentage  is  taken  from  the  value  as  depreciated  the  preceding 


156     PRINCIPLES   OF   INDUSTRIAL   ORGANIZATION 


year,  and  not  from  the  original  value.  Thus,  if  the  percentage 
of  depreciation  be  taken  at  15  the  value  of  the  tool  at  the  end 
of  succeeding  years  will  be  as  shown  by  the  curve  AID  Fig. 
14.  The  method  of  depreciation  by  percentage  on  diminishing 
values  evidently  enforces  a  heavier  reduction  in  value  in  the 
early  life  of  the  asset  and  in  the  case  of  an  entirely  new  enterprise 
this  method  may  make  profits  impossible  unless  a  very  long 
producing  life  is  assumed.  It  is  applicable  particularly  where 
it  is  desired  to  make  a  rapid  reduction  in  the  value  of  an  asset  of 
perishable  or  short-lived  character. 

Table  I  gives  the  comparative  values  and  the  amounts  of  de- 
preciation by  these  methods  for  the  case  noted  above.  It  will 
be  noted  that  the  annual  amounts  set  aside  are  much  greater  in 
the  percentage-on-diminishing-value  method  during  the  earlier 
years  and  less  in  the  later  years.  Table  2  gives  the  depreciated 
value  of  unity  for  different  rates  and  terms  of  years  by  the  per- 
centage-on-diminishing-value  method,  and  may  be  found  useful 
in  assigning  a  rate  of  depreciation  for  an  assumed  working  life. 

TABLED!.  — COMPARISON  OF  METHODS  OF  DEPRECIATION. 


Time. 

By  percentage  on 
original  value. 

By  percentage  on 
diminishing  value. 

Value  at 
time  noted. 

Amount 
of  dep. 

Value  at 
time  noted. 

Amount 
of  dep. 

Beginning  

3000 
2760 
2520 
2280 
2040 
1800 
1560 
1320 
1080 
840 
600 

3000 
2550 
2168 
1843 
1567 
1332 
1132 
962 
818 
695 
591 

End  of  1st  year 

240 
240 
240 
240 
240 
240 
240 
240 
240 
240 

450 
382 
325 
276 
235 
200 
170 
144 
123 
104 

1  2nd  year 

'  3rd  year  

'  4th  year 

'5th  year  

'  6th  year  

'  7th  year  

'8th  year. 

"      '9th  year. 

"      '10th  year. 

Total  amount  written  off  . 

2400 

2409 

THE  DEPRECIATION  OF   WASTING  ASSETS      157 


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158     PRINCIPLES   OF   INDUSTRIAL   ORGANIZATION 


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THE  DEPRECIATION  .OF   WASTING  ASSETS     159 

In  the  sinking-fund  method  of  providing  for  depreciation  a- 
sum  of  money  is  set  aside  annually  such  that  at  compound  in- 
terest it  will  accumulate,1  by  the  end  of  the  producing  life  of  the 
asset,  an  amount  equal  to  the  original  cost  of  the  asset  less  its 
scrap  or  sales  value.  Thus,  in  the  foregoing  example,  if  $190.80 
is  set  aside  annually  at  five  per  cent  interest,  it  will  accumulate 
at  the  end  of  the  ten  years  to  a  total  of  $2400.  This  method  is 
shown  graphically  in  Fig.  14  where  the  curve  AGD  represents 
the  depreciated  value  of  the  same  machine  by  this  method,  the 
vertical  ordinates  between  the  line  AM  and  the  curve  AGD  being 
the  total  of  the  sums  set  aside  annually  plus  the  accumulated 
interest.  It  is  apparent  that  this  method  depreciates  the  asset 
less  in  the  early  years  than  either  of  the  other  methods. 

While  apparently  this  method  differs  from  the  straight  line 
method,  it  is  in  reality  identical  in  principle.  In  both  cases  a 
fixed  amount  is  set  aside  annually,  but  in  one  case  it  is  retained 
in  the  business  as  part  of  the  working  capital,  while  in  the  other 
it  is  set  aside  in  a  bank  or  some  interest-producing  investment. 
In  Fig.  14  the  line  AF  indicates  the  progressive  sum  of  the 
amounts  set  aside  annually  for  a  sinking  fund  for  the  above 
case,  while  the  vertical  distances  between  AF  and  AGD  meas- 
ure the  accumulated  interest.  In  a  similar  way,  if  the  sums  of 
money  retained  annually  from  profits  in  the  straight-line  method 
be  considered  as  earning  only  as  much  as  that  set  aside  in  the 
sinking-fund  method,  the  accumulated  interest  will  be  shown  by 
the  line  AHC  and  it  will  be  noted  that  the  required  deprecia- 
tion of  $2400  wouk}  be  accumulated  between  the  eighth  and 
ninth  years.  In  many  instances  it  may  be  desirable  and  nec- 
essary actually  to  set  aside  a  sinking  fund  as  a  guarantee  against 
contingencies  or  obligations,  especially  where  diverse  interests 
are  concerned  in  the  distribution  of  the  profits.  On  the  other 
hand,  it  does  not  seem  to  be  a  good  financial  policy  for  a  private 
concern  to  set  aside  earnings  to  draw  interest  at  bank  rates 
when,  by  retaining  them  in  the  business,  a  greater  interest  can, 
presumably,  be  earned.  For  if  the  business  cannot  earn  more 

1  For  annuity  tables  giving  accrued  values  of  annual  payments  at  various 
rates  of  interest,  see  Kent's  Engineer's  Pocket  Book,  and  handbooks  generally. 


160     PRINCIPLES   OF    INDUSTRIAL   ORGANIZATION 

than  bank  interest,  it  might  as  well  be  out  of  existence  so  far  as 
profit  producing  is  concerned. 

Furthermore,  the  accounting  of  the  sinking-fund  method  as 
usually  applied  to  depreciation  may  be  faulty.  The  problem 
of  depreciation  is  to  set  aside  from  revenue  an  amount  equal  to 
the  diminution  in  value  that  has  already  occurred.  As  has  been 
noted,  the  exact  rate  at  which  depreciation  occurs  is  difficult  to 
fix;  but  it  is  clear  that  if  the  depreciation  is  really  $240  annually 
instead  of  $190.80,  the  former  amount  should  be  set  aside  and 
the  asset  depreciated  accordingly.  The  final  total  depreciation 
will,  of  course,  be  the  same  in  the  above  case  for  all  the  methods 
discussed,  but  if  the  asset  considered  is  one  that  wastes  rapidly, 
its  real  value  at  any  other  time  than  the  end  of  the  working  life 
will  be  more  accurately  expressed,  perhaps,  by  a  curve  such  as 
AID  than  by  AGD.  Sinking-fund  methods  are,  therefore, 
more  universally  applicable  to  the  problem  of  writing  off  in- 
tangible assets  such  as  patents,  franchises,  development,  ex- 
penses, etc.,  and  for  meeting  definite  obligations  at  a  definite 
future  time  and  where  the  intervening  values  are  not  so  im- 
portant. 

As  before  noted,  there  are  other  methods  of  depreciation  in 
use,  some  of  which  are  simple  and  may  be  very  satisfactory  for 
certain  circumstances  though  their  basic  principles  may  be  arbi- 
trarily chosen.  The  following  method  given  by  W.  M.  Cole  1 
may  be  taken  as  an  illustration.  In  this  method  the  deprecia- 
tion is  calculated  by  multiplying  the  wearing  value  (original 
cost  minus  scrap  value)  by  a  fraction,  the  numerator  of  which 
is  the  remaining  number  of  years  of  life  the  machine  is  estimated 
to  possess,  and  the  denominator  the  sum  of  the  year  numbers 
of  the  total  estimated  producing  life.  Thus,  in  the  example 
quoted  above,  the  estimated  total  life  is  10  years  and  the  de- 
nominator is,  therefore, 

10 +  9  +  8  +  7  +  6  +  5  +  4  +  3  +  2  +  1=  55, 

and  the  numerator  for  the  first  year  is  10,  for  the  second  9,  for 

the  third  8,  and  so  on.     The  depreciation  at  the  end  of  the  first 

year  would  be  (3000-600)  X  B  =  $436;  at  the  end  of  the  second 

1  Accounting  and  Auditing,  by  W.  M.  Cole,  p.  273. 


THE  DEPRECIATION   OF   WASTING  ASSETS     161 

year  it  would  be  (3000-600)  X  5°?  =  $393,  and  so  on.  The  de- 
preciation applied  by  this  method  is  as  heavy,  or  heavier,  during 
the  earlier  years  than  that  computed  by  percentage  on  reduced 
value,  and  the  method  should,  therefore,  be  used  with  caution 
unless  it  is  desired  to  obtain  a  heavy  depreciation  during  the 
early  years  of  the  asset.. 

93.  Classification  and  Rates  of  Depreciation.  In  practically 
all  enterprises  the  character  of  the  several  assets  and  their  rate 
of  depreciation  vary  greatly,  and  due  account  must  be  taken 
thereof.  A  flat  rate  of  depreciation  over  the  entire  plant  may, 
of  course,  be  safe  so  far  as  allowing  for  total  depreciation  is  con- 
cerned, but  seldom  gives  any  indication  of  the  manner  in  which 
it  should  be  distributed.  A  careful  classification  should,  there- 
fore, be  made  of  all  capital  accounts  and  these  again  subdivided 
in  such  detail  as  will  allow  of  intelligent  depreciation  rates.  The 
following  is  a  typical  classification  of  factory  equipment:  — 
Preliminary  expenses,  goodwill,  land,  buildings,  power  house 
machinery  (engines,  boilers,  etc.),  fixed  plant  and  machinery, 
small  loose  plant,  horses  and  terminable  assets,  such  as  mineral 
deposits  or  leases. 

The  treatment  of  these  several  classes  will  depend  very  greatly 
on  circumstances,  and  nothing  more  than  general  suggestions 
can  be  offered.  To  be  on  the  safe  side,  however,  the  manager 
must  shape  his  course  by  trying  to  reduce  the  book  value  of  his 
plant  to  what  it  would  actually  bring  in  the  market,  this  value 
being  usually  much  less  than  the  cost  price  or  even  than  the 
actual  value  of  the  plant  as  a  "  going  concern."  With  this  in 
mind  all  irrecoverable  expenses  such  as  preliminary  legal  ex- 
penses, surveys,  etc.,  and  all  unsaleable  assets,  such  as  founda- 
tions, will  be  written  off  as  rapidly  as  possible.  The  same 
remarks  apply,  usually,  to  such  short-lived  assets  as  patents  and 
goodwill.  It  is  comparatively  unusual,  today,  to  find  that  the 
land  occupied  by  a  factory  needs  to  be  depreciated.  Land 
values  are,  in  most  localities,  on  the  increase,  but  an  appreciation 
of  value  of  the  land  occupied  by  a  factory  should  be  discounted 
if  the  remodelling  of  the  site  for  other  purposes  involves  the 
removing  of  massive  foundations,  chimneys,  etc. 


162     PRINCIPLES   OF    INDUSTRIAL   ORGANIZATION 

The  rate  of  depreciation  for  buildings  will,  of  course,  vary  con- 
siderably with  the  character  of  construction  and  the  work  that 
they  house.  Thus,  heavy  stone  and  brick  buildings  used  for 
storehouses  will  far  outlast  cheap  wooden  or  even  steel  frame 
buildings  used  for  such  severe  service  as  forge  shops,  or  indus- 
tries requiring  the  use  of  heavy  cranes  that  severely  rack  the 
framework.  Again,  the  life  of  machinery  will  depend  on  the 
excellence  of  its  original  construction  and  the  service  to  which 
it  is  devoted.  A  portable  hoisting  engine  would  not  be  expected 
to  last  as  long  as  a  Corliss  engine  in  a  well-kept  engine  room; 
and  a  large  boring  mill,  if  used  infrequently,  will  outlast  many 
renewals  of  small  tools. 

The  following  list  (Table  3)1  may  be  taken,  therefore,  as  giving 
average  values,  only,  for  buildings  and  machinery  kept  in  a  fair 
state  of  repair,  and  including  obsolescence.  Column  four  gives 
the  rate  that  must  be  applied  by  the  percentage-on-original-cost 
method  to  reduce  this  original  cost  to  the  residual  value  noted 
in  column  two  during  the  estimated  life  of  the  asset.  Column 
five  gives  corresponding  rates  for  the  method  of  percentage  on 
diminishing  values.  It  will  be  noted  that  these  last  rates  are, 
as  a  whole,  much  higher  than  the  former.  While  it  may  be 
desirable,  as  before  noted,  to  depreciate  very  heavily  in  the  early 
years  of  the  life  of  the  asset  it  is  often  not  so  expedient,  and  actual 
depreciation  rates  even  if  based  on  the  principle  of  diminishing 
values  are  usually  lower  thafi  those  given  in  column  five,  the 
difference  often  being  compensated  for  by  renewals  and  extensive 
repairs,  thus  practically  extending  the  life  of  the  asset. 

Engineering  expenses  for  production,  drawings  and  patterns 
should,  when  possible,  be  charged  to  specific  production  orders. 
Where  this  is  impossible,  as  in  the  case  of  the  development  of  a 
line  of  machines,  such  expenses  should  be  carried  to  a  develop- 
ment account  and  charged  off  over  a  definite  number  of  machines. 
Particular  care  should  be  used  in  crediting  patterns  as  an  asset. 

1  For  a  detailed  list  of  depreciation  factors  and  estimated  length  of  life 
of  various  properties,  see  Engineering  Valuation  of  Public  Utilities  and  Fac- 
tories, by  Horatio  Foster,  p.  194,  or  Valuation  of  Public  Utility  Properties, 
by  Henry  Floy,  page  188. 


THE  DEPRECIATION  OF  WASTING  ASSETS     163 


TABLE  3.  —  ESTIMATED  LIFE  AND  FACTORS  OF 
DEPRECIATION. 


Character  of  asset. 

Probable 
life  of 
asset  in 
years. 

Ratio  of 
scrap 
value  to 
original 
value. 

Percentage  on 
original  cost. 

Percentage  on 
diminishing 
value. 

Brick  or  steel-frame  buildings, 
easy  service               

40 

0.10 

2.25 

5  5 

Brick  or  steel-frame  buildings, 
severe  service  

20 

0.10 

4.5 

11 

Good  wooden  buildings,   easy 
service 

30 

0.10 

3 

7  5 

Good  wooden  buildings,  severe 
service                           

15 

0.10 

6 

14 

Steam  engines  
Steam  boilers                 

15  to  30 
15  to  30 

0.10 
0.10 

6  to  3 
6  to  3 

14  to  7.  5 
14  to  7.  5 

Boiler-room  feed  pumps  
Engine  room  instruments  and 
gauges      

20 
10 

0.05 
0.05 

4.75 
9.5 

14 
26 

Steam-piping,    valves   and   fit- 
tings              

10  to  15 

0.05 

9.5    to  6.  3 

26  to  18 

Portable  engines  and  boilers  — 
Gas  engines 

10 
10  to  15 

0.05 
0.05 

9.5 
9  5    to  6.3 

26 
26  to  18 

Turbo-  generators 

20  to  30 

0.10 

4.5    to  3 

11  to  7  5 

Electric  generators                

20  to  30 

0.10 

4.5    to  3 

11  to  7.5 

Electric  motors 

20 

0.10 

4.5 

11 

Storage  batteries      .                 ... 

10 

0.05 

9.5 

26 

Switchboard  and  instruments  .  .  . 
Heavy  machine  tools  

15 
25 

0.05 
0.10 

6.3 
3.6 

18 
9 

Light  machine  tools  

15  to  20 

0.10 

6  to  4.  5 

14  to  11 

Shafting,  hangers  and  pulleys.  .  . 
Belting 

20  to  30 
10  to  25 

0.05 
0 

4.75  to  3 
10  to  4  0 

14  to  9 

If  used  frequently,  they  soon  wear  out,  and  if  not  used,  they  are 
not  only  of  little  value  but  often  occupy  valuable  storage  space 
that  could  be  used  for  other  purposes.  Metal  patterns,  of  course, 
have  an  intrinsic  residual  value. 

Small,  loose  plant  such  as  hand  tools,  chains,  ropes,  foundry 
flasks,  etc.,  wear  out  so  rapidly  that  they  should  be  carried  at  a 
very  low  value.  The  better  way  to  consider  much  of  the  small, 
loose  plant  is  to  renew  it  entirely  out  of  revenue  and  charge  it 
off  as  expense.  Horses  should  also  be  carried  at  a  nominal  value 
because  of  their  perishable  character.  Terminable  asset,  such 
as  mineral  deposits,  leases,  loans,  etc.,  are  best  cared  for  by 
means  of  a  sinking  fund  as  explained  in  Art.  92. 


164    PRINCIPLES  OF   INDUSTRIAL   ORGANIZATION 

A  complete  inventory  should  be  maintained  listing  all  build- 
ings, machinery  and  tools.  This  inventory  is  most  conveniently 
formed  on  the  card  index  or  loose  leaf  principle,  a  card  or  leaf 
being  provided  for  each  item.  Fig.  15  illustrates  such  a  card, 
and  it  will  be  noted  that  it  gives  a  life  history  of  the  machine, 
including  original  cost,  weight,  location,  residual  value,  rate  of 
depreciation,  repairs  and  additions,  and  also  the  history  of  any 
special  attachments  that  may  have  been  used  with  it.  Records 
of  this  kind  constitute  a  plant  ledger.  A  ledger  may  be  main- 
tained for  standard  plant  and  one  for  special  fixtures  if  desired. 
The  plant  ledgers  with  the  cost  accounts,  the  stores  and  stock 
ledgers  constitute  an  inventory  of  the  material  assets  of  the  plant. 

94.  Investment  and  Distribution  of  Depreciation.  It  is  clear 
that  the  setting  aside  of  funds  out  of  revenue  to  compensate  for 
depreciation  is  equivalent  to  transferring  a  part  of  the  fixed 
assets  to  the  floating  assets,  the  total  value  of  the  assets  remain- 
ing unchanged  if  the  computations  are  correctly  made.  The 
primary  object  of  this  reserve  is  to  provide  for  repairs  and  re- 
placements, and  if  not  needed  for  this  purpose  it  may  be  em- 
ployed elsewhere  in  the  business;  or,  if  not  needed  thus,  it  should, 
of  course,  be  invested  so  that  it  will  be  earning  interest.  The 
relation  between  depreciation,  repairs  and  capital  account  has 
been  discussed  already  in  Art.  91  and  the  principles  therein 
noted  should  be  carefully  observed  in  making  "  betterments  " 
which  may  be  either  repairs,  additions  to  capital  or  a  combina- 
tion of  both.  Generally  speaking,  all  prosperous  enterprises 
tend  to  grow  in  size  (See  Art.  21)  and  if  earnings  set  aside  for 
depreciation  are  used  to  extend  the  plant,  care  should  be  taken 
that  such  additions  are  not  credited  to  the  capital  account  if 
their  value  is  offset  elsewhere  by  uncared-for  deterioration. 

Depreciation,  as  has  been  noted,  is  a  just  charge  against 
production  and  should,  properly,  be  included  in  the  manufac- 
turing expenses  and  distributed  with  them.  The  somewhat 
common  practice  of  fixing  costs  without  including  depreciation, 
trusting  to  profits  being  large  enough  to  declare  a  dividend 
after  deducting  depreciation,  cannot  be  considered  a  safe  policy, 
especially  where  the  books  are  closed  but  once  a  year.  The 


THE  DEPRECIATION  OF   WASTING  ASSETS     165 


STANDARD  PLANT  LEDGER 

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ESTIMATED  LIFE  20  YEARS 

PROBABLE  SELLING  VALUE  #200 

RATE  OF  DEPRECIATION  8% 

DEPRECIATED  VALUE  AT  END  OF  YEAR  | 

:PAIRS  AND  ALTERATIONS  AFFECTING  DEPRECIATION  | 

DEBIT 

\  FOR  COST  OF  INSTALLATION  AND  ATTACHMENTS  SEE  REVERSE  SIDE  1 

^ 

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DEBIT 

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DESCRIPTION 

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1  TAPER  ATTACHMENT 

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166     PRINCIPLES   OF   INDUSTRIAL   ORGANIZATION 

argument  may  be  used  that  to  include  depreciation  in  factory 
costs  might  raise  the  total  cost  above  the  market  price,  and 
that  it  is  better  to  wait  till  the  end  of  the  year  to  see  what  allow- 
ance can  be  made  for  depreciation.  This  argument  is,  of  course, 
fallacious.  Cost  is  cost,  and  the  manufacturer  that  has  included 
all  items  of  cost  in  his  manufacturing  expenses  can  see  much 
more  clearly  where  he  must  reduce  manufacturing  costs  to  meet 
competition,  and  the  manufacturer  that  can  meet  competition 
is  the  one  that  will  eventually  survive.  The  practice  of  in- 
cluding depreciation  in  the  general  expense  as  a  percentage  of 
the  total  wasting  assets  is,  of  course,  safe  so  far  as  total  costs 
are  concerned,  but  all  the  arguments  in  Articles  72  and  81  re- 
garding the  distribution  of  expense  in  a  scientific  manner  apply 
also  to  depreciation;  and  with  advances  in  cost-keeping  methods, 
this  item  of  expense  will  be  distributed  more  as  a  machine  rate 
and  less  as  a  uniform  percentage  on  labor  or  time  elements  of 
cost.  In  continuous  industries  it  is  easy,  of  course,  to  charge 
off  depreciation.  Thus  in  cement  mills  it  is  common  practice 
to  add  a  certain  amount  per  barrel  or  sack  to  care  for  this  item, 
but,  as  noted  in  Article  83,  when  manufacturing  processes  be- 
come more  complex,  the  problem  is  more  difficult  and  requires 
careful  consideration.  Each  department  should,  if  possible, 
bear  its  own  share  of  depreciation  and  one  line  of  goods  should 
not  be  burdened  with  the  wear  and  tear  or  obsolescence  charges 
belonging  to  another. 

95.  Conclusion.  In  concluding  this  brief  outline  of  the  prin- 
ciples of  depreciation  it  may  be  well  to  repeat  that  it  is  seldom 
possible  to  lay  down  exact  rules  for  any  kind  of  a  plant.  Con- 
ditions change  from  year  to  year;  the  machine  or  process  that 
is  valuable  today  is  obsolete  tomorrow,  and  the  state  of  trade 
may  and  usually  does  modify  greatly  what  may  be  a  very  de- 
sirable course  of  procedure.  In  dull  times  it  may  not  be  possible 
to  depreciate  as  fully  as  desired,  and  in  good  times  it  may  be 
desirable  to  make  a  greater  allowance  than  might  be  really  nec- 
essary under  normal  conditions.  However,  the  fact  remains 
that  depreciation  is  an  important  expense  that  cannot  be  neg- 
lected and  a  well-defined  system  even  though  it  cannot  be  rig- 


THE  DEPRECIATION  OF   WASTING  ASSETS     167 

idly  adhered  to,  will  assist  materially  to  a  clearer  understanding 
of  the  problem.  The  slower  the  deterioration  the  more  important 
it  is  that  depreciation  be  executed  systematically  since,  where  the 
life  is  short,  renewals  from  revenue  are  more  frequent  and  force 
themselves  upon  the  attention  of  the  manager.  Long-lived  as- 
sets, therefore,  need  more  careful  consideration  in  order  that  the 
accumulated  uncared  for  deterioration  of  years  may  not  be  the 
means,  as  it  often  is,  of  wrecking  the  enterprise. 

REFERENCES  : 

The  Depreciation  of  Factories,  by  Ewing  Matheaon. 

Engineering  Valuation  of  Public  Utilities  and  Factories,  by  Horatio 

A.  Foster. 

Depreciation  and  Wasting  Assets,  by  P.  D.  Leake. 
The  Depreciation  of  Plant,  by  H.  M.  Norris.     Engineering  Magazine, 

Number  16,  1899,  p.  812  and  957. 
Valuation  of  Public  Utility  Properties,  by  Henry  .Floy. 


CHAPTER  XL 

THE   COMPENSATION   OF  LABOR. 

96.  Basic  Features.  It  is  almost  axiomatic  that  the  industrial 
problems  dealing  with  materials,  machinery  and  the  physical 
side  of  industry  are  relatively  important  only  as  they  bear  on 
the  greater  problems  of  human  existence,  and  for  this  reason 
the  problem  of  rewarding  men  for  services  rendered  is  by  far  the 
most  important  and  at  the  same  time  the  most  difficult  of  all 
industrial  problems.  This  is  necessarily  so  because  it  bears  so 
directly  on  the  great  problem  of  distribution  of  wealth,  and 
because  it  touches  so  closely  upon  human  nature  with  all  its 
ambitions,  hopes,  and  fears.  The  problem  has  been  with  man 
from  the  beginning,  changing  in  aspect  as  he  has  changed  his 
methods  and  ideals,  and  will  probably  continue  to  be  with  him 
to  the  end. 

It  was  inevitable  that  the  changed  industrial  methods  dis- 
cussed in  the  foregoing  chapters,  with  the  changed  personal  re- 
lations resulting  therefrom,  should  bring  with  them  new  methods 
of  compensating  labor.  Under  the  older  and  simpler  methods 
the  relations  between  master  and  man  were  personal  and  often 
very  close.  The  apprentice,  and  sometimes  the  mature  work- 
man, was  often  treated  like  a  member  of  the  employer's  family, 
a  relation  that  now  survives  only  in  a  few  callings,  such  as  agri- 
cultural service.  Nor  was  this  relation  wholly  lost  even  after 
the  introduction  of  modern  tools  began  to  specialize  men,  so 
long  as  the  number  employed  by  any  one  man  was  compara- 
tively small.  Furthermore,  under  the  simpler  methods,  where 
the  tools  of  industry  were  within  comparatively  easy  reach  of 
all  and  especially  in  this  country  where  congested  populations 
had  not  yet  appeared,  where  land  was  still  plentiful  and  the 
avenues  to  all  industry  still  easily  accessible,  the  law  of  supply 

168 


THE  COMPENSATION  OF  LABOR  169 

and  demand  was  much  more  effective  in  regulating  the  com- 
pensation of  labor  than  at  present. 

As  the  new  methods  advanced  and  aggregation  and  speciali- 
zation became  more  effective,  these  simple  relations  were  oblit- 
erated. As  explained  in  Articles  29  and  30,  these  influences 
constantly  tend  to  separate  men  into  classes  and  as  numbers 
increase,  the  workman  is  separated  farther  and  farther  from  the 
employer,  till  today,  in  all  large  industries,  labor  has  lost  all 
personal  attributes  and  appears  to  the  employer  as  a  com- 
modity to  be  purchased  at  the  lowest  market  price.  True,  the 
employer  is  as  interested,  and  perhaps  more  so  than  ever,  in 
securing  efficient  help,  but  the  securing  of  this  help  is  delegated 
to  others  and  the  working  agreement  is  based  on  strict  business 
principles  with  little  or  no  personality  entering  into  the  bargain. 
As  competition  became  keener  the  employer  found  that  he  must 
either  improve  his  methods  or  cut  his  wage  rates.  The  first 
became  increasingly  difficult  and  was  often  impossible,  while  the 
latter  always  appeared  to  be  a  natural  and  defendable  procedure 
under  the  old  day  rate  system  of  compensation.  The  idea  of 
obtaining  increased  output  by  increased  pay  came  as  a  later 
development  of  the  study  of  labor  compensation. 

The  workman,  on  the  other  hand,  cut  off  from  the  ownership 
of  his  tools  and  finding  himself  increasingly  dependent  on  the 
employer  for  his  daily  bread,  brought  face  to  face  daily  with  new 
labor-saving  machinery,  and  observing  the  degradation  of  labor 
that  nearly  always  followed  its  introduction,  most  naturally 
set  up  what  defences  he  could  against  these  tendencies  that 
carried  him  toward  an  ever  decreasing  compensation.  As  the 
individuality  of  the  worker  was  lost  in  that  of  the  class  (See  Art. 
30),  organization  against  common  danger  was  most  easy  and 
natural.  Labor  unions  are  a  most  natural  result  of  our  changed 
industrial  methods.  They  cannot  be  legislated  out  of  existence 
but  will,  like  their  prototypes,  the  old  guilds,  persist  till  the 
causes  of  their  growth  are  removed  by  radical  -changes  in  our 
industrial  organization. 

As  a  net  result  of  these  changes  labor  compensation  is  no 
longer  a  simple  matter  based  on  the  law  of  supply  and  demand, 


170    PRINCIPLES   OF   INDUSTRIAL   ORGANIZATION 

but  is  more  likely  to  be  based  on  a  sharp  bargain  driven  between 
two  opposing  parties  with  many  complex  and  confusing  condi- 
tions that  tend  to  modify  this  law  or  render  it  at  least  very 
sluggish  in  its  action.  It  is  this  very  complexity  of  influences 
that  makes  the  labor  problem  so  difficult  of  solution  because  it 
renders  exact  information  difficult  to  obtain.  A  continued 
struggle  between  organized  labor  demanding  all  that  it  can  get 
and  organized  capital  banded  together  to  oppose  stubbornly 
the  demands  of  labor  cannot  be  expected  to  result  in  a  solution 
of  the  problem.  If  there  is  hope  of  a  peaceful  solution  it  must 
lie  in  a  systematic  and  scientific  investigation  of  the  facts  of 
each  case;  and  if  contending  parties  cannot  settle  their  dif- 
ferences amicably  on  such  a  basis,  communal  control  of  some 
kind  will  undoubtedly  enforce  a  settlement  or  suggest  a  remedy. 
It  should  be  particularly  noted,  however,  that  legislative  action, 
boards  of  arbitration  or  any  other  communal  instrument  cannot 
be  expected  to  render  satisfactory  decisions  that  will  be  perma- 
nent till  much  more  is  known  of  the  exact  facts  concerning  labor 
than  is  usually  available  at  present.  Anything  approaching  a 
comprehensive  study  of  this  interesting  problem  is  beyond  the 
scope  of  this  treatise,  but  the  discussion  of  the  wage  systems  that 
follows  may  make  the  above  points  clearer. 

To  the  manufacturer,  whose  capital  investment  in  machines 
is  large,  the  question  of  wages  has  much  greater  importance  than 
their  numerical  value  would  indicate.  The  wages  of  a  machine 
operator  may  not  be  great,  but  the  output  of  the  machine  he 
controls  may  be  very  great,  and  any  failure  or  slackness  on  his 
part  may  be  reflected  many  fold  in  the  decreased  production 
of  his  machine.  It  does  not  pay,  therefore,  to  have  inefficient 
men  operating  expensive  machines,  where  effectiveness  or  de- 
ficiency on  the  part  of  the  workman  is  multiplied  many  fold  in 
the  product.  And,  furthermore,  as  a  perfectly  general  principle, 
the  more  efficient  the  workman  the  greater  will  be  the  output 
for  a  fixed  capital  investment  and  fixed  conditions  of  production. 
And  this  output  will  be  obtained  at  lower  unit  cost  since  it  will 
be  obtained  without  appreciable  additional  burden,  since  burden 
in  general  does  not  vary  in  proportion  to  output  but  tends  to 


THE   COMPENSATION  OF  LABOR  171 

remain  constant  through  a  considerable  range  of  variation  of 
output.  It  is  clear  that  low  paid  workmen  may  not  always  be 
the  cheapest;  in  fact,  a  low  rate  of  pay  is  likely  to  indicate  a  low 
rate  of  output.  This  idea  forms  one  of  the  basic  features  of 
modern  pay  systems  that  recognize  the  importance  of  obtaining 
the  best  results  out  of  every  man  even  though  increased  com- 
pensation is  necessary  to  secure  this  result. 

97.  The  Primary  Pay  Systems.     There  are  only  two  funda- 
mental methods  of  rewarding  labor;   one  is  by  paying  the  man 
for  the  amount  of  time  that  he  spends  on  the  work  and  the  other 
by  paying  him  for  the  amount  of  work  that  he  performs.     The 
first  method  is  usually  characterized  as  day  work  because  the 
rate  of  pay  is  most  usually  by  the  day,  or  per  diem.     The  second 
is  usually  called  piece  work  since  compensation  is  by  the  piece 
or  job.     All  other  wage  systems  are  combinations  of  these  two 
principles   in  varying   proportions.     Some    of    these    combina- 
tions are  occasionally  termed  profit-sharing  systems  because  of 
certain  gain-sharing  features  that   are  incorporated  in  them. 
This  is  erroneous  in  two  particulars.     No  money  paid  out  di- 
rectly as  a  reward  of  labor  can  by  any  stretch  of  imagination  be 
classed  as  profit  which  is  always  an  undistributed  balance  after 
all  costs  of  production  are  paid  in  full.     Nor  can  any  money 
distributed  as  profit  be  considered  as  a  wage  payment,  for  the 
same  reason.     Profit-sharing  schemes  are  in  the  nature  of  an 
extra  reward,  not  only  for  skill  and  industry,  but  for  faithfulness 
of  service  over  some  considerable  period  of  time,  usually  a  year. 
Gain-sharing  is  a  correct  name  for  the  new  pay  systems,  to  be 
described,  such  as  premium  and  bonus  systems,  for  the  element 
of  gain-sharing  is  embodied  in  them;  but  they  are,  nevertheless, 
combinations  of  the  two  primary  systems  named  above. 

DAY  WORK. 

98.  General  Features.     Under  the  day-work  system  of  wages 
the  employer  buys  the  time  of  the  worker.     The  unit  of  time 
bought  may  vary  from  one  hour  to  a  year  so  that  the  term  day 
work  is,  in  a  way,  a  misnomer,  handed  down  to  us  from  the  time 
when  the  day  was  a  more  common  unit  for  wage  payment.     The 


172     PRINCIPLES   OF   INDUSTRIAL   ORGANIZATION 

higher  the  grade  of  the  employee  the  longer,  as  a  rule,  is  the  time 
unit.  Thus  managers,  treasurers  and  higher  officials  are  usu- 
ally engaged  by  the  year,  though  most  usually  paid  by  monthly 
installments.  Foremen  and  engineers  may  be  hired  by  the 
month,  other  classes  by  the  day  or  hour.  As  the  unit  of  time 
bargained  for  becomes  greater  the  less  supervision,  presumably, 
is  needed  to  obtain  value  received,  since  the  men  on  monthly  or 
yearly  salaries  are,  usually,  not  numerous,  comparatively,  and 
are  selected  with  a  view  to  being  enough  interested  in  their  work, 
or  what  is  more  likely,  loaded  with  enough  responsibility  to 
insure  good  service. 

The  method  of  day  work  is,  without  doubt,  the  oldest  method 
of  rewarding  labor  and  the  reason  for  its  inception  is  not  difficult 
to  see.  In  the  beginning  of  any  civilization  industry  is  simple 
and  general.  The  farm  hand  was  required  to  do  many  and 
diverse  duties,  each  one  occupying,  perhaps,  a  short  portion  of 
his  daily  service  which  was  not  limited  to  definite  hours  but  set 
in  accordance  with  the  necessities  of  the  case.  Domestic  service 
of  to-day  is  an  excellent  example  of  this  form  of  employment  of 
which  only  a  few  types  have  survived.  Much  of  the  early  man- 
ufacturing industry  was  of  this  same  general  character.  A 
machinist  of  fifty  years  ago  was  expected  to  do  all  manner  of 
work  on  a  large  range  of  machines  working,  perhaps,  on  many 
jobs  in  the  same  day.  Taking  into  account  the  more  or  less 
paternal  attitude  of  the  old  employer  toward  his  workman,  the 
day-work  method  was  a  very  natural  system  and  not  without 
its  advantages.  Where  the  number  of  men  employed  was  small 
and  personal  relations  close,  the  employer  was  able  to  reward 
diligence  and  skill  in  something  like  a  just  proportion;  and  he 
depended  on  personal  observation,  either  on  his  own  part,  or 
through  the  use  of  not  more  than  one  intermediary,  to  insure 
a  fair  return  from  each  man  for  the  wages  paid.  The  personal 
element  was  a  large  factor,  and  there  was  always  the  hope  for 
the  abler  men  that  through  industry  they  might  rise  either  to  a 
higher  paid  position,  or  get  into  business  for  themselves. 

99.  Defects  of  the  Day-work  Method.  As  the  influences  of 
aggregation  and  specialization  began  to  make  themselves  felt, 


THE   COMPENSATION  OF  LABOR  173 

and  the  personal  relations  vanished,  the  day-work  method  be- 
came less  and  less  applicable.  As  the  personality  of  the  work- 
man was  merged  by  these  influences  into  that  of  a  class  it  became 
more  and  more  difficult  for  the  individual  to  make  his  superior 
qualities  known  and  more  and  more  difficult  for  the  employer 
to  reward  industry  and  skill  in  adequate  proportion.  The  em- 
ployer ceased  to  hire  men,  as  men,  and  began  to  buy  labor  like 
any  other  commodity.  The  inevitable  result  was  that  the 
better  men,  unable  to  obtain  higher  pay  than  their  more  ineffi- 
cient fellows,  organized  their  class  and  endeavored  to  raise  the 
wage  level  of  the  entire  class  as  the  only  means  of  obtaining  the 
desired  compensation. 

On  the  other  hand  workmen  on  day  pay  had  great  oppor- 
tunity of  restricting  output,  even  in  spite  of  rapid  advances  in 
machinery  since,  as  will  presently  appear,  little  was  known  as  to 
the  possibilities  of  production  with  the  new  tools.  The  work- 
man, instinctively  feeling  that  he  could  influence  the  law  of  sup- 
ply and  demand  in  his  favor  by  limiting  the  output,1  did  not 
work  up  to  his  capacity  and  under  these  circumstances  pro- 
duction tended  to  mediocrity  or  even  to  the  standard  of  the 
poorer  workman.  Any  efforts  to  drive  men  to  higher  output  are 
almost  invariably  met  by  stubborn  organized  class  resistance, 
while  the  employer  who  pays  only  the  rate  earned  by  the  poorest 
man  may  get  only  the  output  he  pays  for,  even  from  his  very  best 
men. 

Day  work,  therefore,  has  often  proved  inadequate  and  unfair 
both  to  employer  and  employee  in  modern  mass  production  in- 
volving large  numbers  of  men  and  specialized  labor.  It  is  a 
system  that  is  adapted  naturally  to  general  work  and  even  here 
in  its  simplest  form  is  fully  adequate  for  small  numbers  only. 
It  will  remain  in  use,  however,  in  many  places  where  it  is  and 

1  The  workman  should  not  be  censured  for  this  tendency.  Self-preser- 
vation is  the  first  law  of  nature.  With  the  most  apparent  effects  of  the  new 
system  staring  him  in  the  face  and  his  economic  independence  taken  from 
him,  it  is  not  to  be  expected  that  he  would  be  willing  to  suffer  any  present  loss 
because,  economically,  future  generations  would  be  benefited.  It  must  be  re- 
membered that  the  economic  benefits  resulting  from  new  methods  do  not  al- 
ways accrue  to  those  directly  interested  in  the  industry  affected  (See  Art.  9). 


174     PRINCIPLES   OF   INDUSTRIAL   ORGANIZATION 

where  it  is  not  suitable,  simply  from  its  inertia.  Mr.  Gantt1  has 
very  ably  pointed  out  how  its  usefulness  and  effectiveness  may 
be  extended  by  separating  each  man's  work  from  his  neighbor's 
and  by  keeping  a  careful  record  of  individual  performance,  thus 
restoring,  in  a  measure,  the  possibility  of  individual  superiority 
and  reward,  and  obtaining  a  clear  and  more  accurate  idea  of  the 
time  actually  required  to  do  a  given  piece  of  work. 

PIECE  WORK. 

100.  General  Features.  In  piece-work  pay  systems  the  man 
is  paid  for  the  amount  of  work  performed  and  not  for  the  time  ex- 
pended. Thus,  suppose  a  man  earning  $3.00  per  day  was  making 
bolts  for  his  employer.  His  pay  would  not  change  under  this 
day  pay  system  whether  he  made  ten  or  fifteen  bolts  daily.  But 
suppose  he  were  paid  by  the  bolt  at  the  rate  of  twenty  cents2  each. 
Then  he  must  make  fifteen  bolts  to  earn  $3.00.  Any  falling  off 
in  his  production  would  mean  lowered  daily  earnings,  while 
any  increase  in  his  production  would  mean  an  increase  in  pay. 
If  the  rate  per  piece  is  fair  to  both  employer  and  employee  this 
would  seem  to  be  an  ideal  system  in  many  ways  as  it  apparently 
restores  to  the  ambitious  workman  the  opportunity  to  secure 
the  increased  compensation  due  him  on  account  of  his  greater 
skill  or  diligence.  If  it  successfully  stimulates  production  it 
lowers  the  cost  of  the  product,  since  the  increased  production 
is  obtained  with  practically  no  increase  in  overhead  costs.  Thus, 
suppose  in  the  above  example TEaFthe~material  cost  per  bolt  is 
10  cents,  and  the  machine  rate3  (See  Art.  79)  for  the  equipment 
he  is  using  is  $2.00  per  day;  then  the  cost  per  bolt  to  the  em- 
ployer for  various  rates  of  production  would  be  as  shown  in 
Table  4. 

1  See  Work  Wages  and  Profits,  p.  59. 

2  Piece  rates  are  usually  set  somewhat  lower  than  the  corresponding  day  rate. 

3  The  effect  of  including  material  cost  and  machine  rates  in  total  costs 
should  be  carefully  noted.     The  first  does  not  affect  the  difference  in  total 
costs  but  does  affect  their  ratio.     The  second  affects  their  difference  as  well. 
Costs  that  do  not  include  labor,  material  and  burden  are  misleading  for  pur- 
poses of  comparison  especially  if  compared  with  other  costs  where  these  items 
enter  hi  different  proportions. 


THE  COMPENSATION  OF  LABOR 


175 


TABLE  4.  —  EARNINGS  AND  COSTS  UNDER  PIECE  WORK. 


Number  of 
bolts  per  day. 

Material 
cost. 

Workman's 
earnings. 

Machine 
rate. 

Total  shop 
cost. 

Cost  per 
bolt. 

10 

1.00 

2.00 

2.00 

5.00 

0.50 

15 

1.50 

3.00 

2.00 

6.50 

0.43| 

20 

2.00 

4.00 

2.00 

8.00 

0.40 

30 

3.00 

6.00 

2.00 

11.00 

0.36f 

40 

4.00 

8.00 

2.00 

14.00 

0.35 

50 

5.00 

10.00 

2.00 

17.00 

0.34 

The  workman,  therefore,  makes  a  higher  wage,  the  cost  of 
the  product  is  lessened,  and  the  output  per  dollar  of  investment 
is  increased  so  that  both  employer  and  employee  are  benefited. 

Piece  work  is  evidently  not  adapted  to  cases  where  many  pieces 
of  different  character  are  handled  daily.  It  lends  itself  nat- 
urally to  repetitive  work,  that  is,  where  many  pieces  of  one  kind 
are  to  be  made.  It  can  be  applied  to  advantage,  however,  to 
small  numbers  of  parts  where  the  work  to  be  done  on  each  is  of 
sufficient  magnitude  to  make  intelligent  estimates  of  time  al- 
lowances possible. 

101.  Difficulties  and  Objections.  Piece  work  is  of  course 
not  new,  and  has  probably  existed  in  some  form  or  other  from 
early  antiquity.  For  reasons  already  discussed  it  did  not,  how- 
ever, obtain  a  strong  foothold  in  our  industrial  organization  in 
the  beginning.  When  the  limitations  of  the  day  wage  method 
discussed  in  Article  99  began  to  make  competition  more  difficult 
and  as  the  volume  of  production  increased,  employers  naturally 
turned  to  the  piece-rate  system  as  a  means  of  increasing  pro- 
duction and  reducing  cost.  These  very  limitations  of  the  day 
wage,  however,  have  been,  in  a  large  measure,  the  reason  for 
one  of  the  greatest  difficulties  in  introducing  piece  rates.  Under 
modern  conditions  the  discouraging  effects  of  day  work  had 
tended,  as  already  noted,  to  reduce  greatly  the  output  so  that 
with  the  advance  in  modern  tools  and  methods  little  was  really 
known  regarding  the  possibilities  of  production  or  what  really 
constituted  a  fair  day's  work.  The  records  of  work  already 
accomplished  were,  therefore,  unreliable  as  a  guide  in  setting 


176     PRINCIPLES   OF   INDUSTRIAL   ORGANIZATION 

piece  rates,  and  the  estimates  of  a  busy  foreman  were  likely  to 
be  little  better  than  guesses. 

When,  therefore,  piece  rates  were  introduced,  based  on  these 
unreliable  sources,  it  was  found  that  the  workman  under  this 
stimulus  could  produce  much  more  than  it  was  supposed  he 
could.  An  examination  of  the  foregoing  table  (the  data  of 
which  are  taken  arbitrarily  but  are  fairly  representative)  shows 
that  under  these  conditions  the  increase  in  wages  is  very  much 
greater  in  proportion  than  the  decrease  in  cost.  The  result  was 
that  the  employer  either  from  cupidity,  or  because  he  really 
believed  the  worker  was  obtaining  more  than  a  fair  share  of  the 
returns,  "  cut  "  the  piece  rate  to  a  lower  figure. 

If  the  new  piece  rate  allowed  of  it,  and  if  the  ambition  of  the 
worker  was  not  killed  by  the  first  cut,  and  he  again  succeeded 
in  raising  his  wage  to  a  high  figure,  the  rate  was  again  cut;  and 
this  cycle  was  repeated  till  the  discouraged  worker  refused  to 
exert  himself  farther  and  perhaps  found  himself  working  much 
harder  than  formerly  with  little  or  no  advance  in  his  salary. 

The  general  effect  of  this  penalizing  process  upon  the  good 
workman  is  to  teach  him  to  limit  his  production  to  that  of  the 
poorer  man  and  to  awaken  class  consciousness.  He  quickly 
sees  that  an  advance  in  wages  cannot  come  through  his  own 
extra  exertions  and  he  naturally  turns  to  organization  as  a  means 
of  securing  by  might  what  he  feels  should  be  his  by  right;  and 
he  is  willing  that  poorer  men  shall  be  overpaid  in  order  that  he 
may  receive  something  near  what  he  feels  is  his  just  due.  The 
logic  is  perfectly  clear  and  he  cannot  be  blamed  for  the 
result. 

Piece  work  has  also  been  opposed  upon  other  grounds.  The 
average  workman  much  prefers  day  pay  because  it  involves  no 
risk  as  to  the  amount  he  is  to  receive.  In  some  respects  there 
is  a  good  reason  for  this  objection.  If  the  workman  on  day  pay 
encounters  extra  hard  castings  or  if  his  production  is  interfered 
with  by  reason  of  a  break  down  or  other  unforeseen  contingency 
over  which  he  has  no  control,  the  entire  loss  occasioned  thereby 
falls,  not  on  him,  but  on  his  employer;  while  on  piece  work  he 
would  be  a  loser  to  the  extent  of  his  probable  earnings.  It  has 


THE   COMPENSATION  OF  LABOR  177 

been  opposed  by  labor  unions  on  ethical  grounds,1  because  it  is 
asserted  that  the  system  awakens  greed  in  the  worker  and  stim- 
ulates unrestricted  competition  between  them,  with  the  result 
that  discord,  suspicion  and  the  destruction  of  brotherly  feeling 
soon  take  the  place  of  harmony  and  good  will.  While  the  truth 
of  this  assertion  is  denied  by  some,  the  writer  knows  by  personal 
experience  that  there  is  a  considerable  amount  of  truth  in  the 
statement.  Competition  between  workmen  has  the  same  effect 
as  competition  between  employers  or  corporations,  and  this  prin- 
ciple must  often  be  taken  into  account  in  introducing  new  wage 
systems. 

And,  finally,  the  workman  is  prone  to  object  to  any  method 
that  tends  to  increase  production,  simply  because  it  does  tend  to 
do  so.  He  may  not  be  able  to  explain  just  why,  but  as  before 
noted,  he  instinctively  feels  that  by  restricting  production  he 
can  affect  the  law  of  supply  and  demand  in  his  favor.  He  is 
interested  in  his  own  welfare,  and  not  that  of  the  men  of  the 
future;  hence  economic  arguments  based  on  the  ultimate  gain 
accruing  from  increased  production  do  not  impress  him.  This 
attitude,  short  sighted  as  it  may  be,  is  reflected  in  union  regula- 
tions that,  while  allowing  the  use  of  piece  work,  often  fix  a 
maximum  number  of  pieces  that  any  man  may  turn  out  in 
a  day. 

It  will  be  noted  that  the  defects  and  objections  to  piece  work 
may  be  those  due  to  bad  management  (including  lack  of  accurate 
knowledge)  or  to  inherent  defects  in  the  method  itself.  Piece 
work  has  been  operated  very  successfully  where  the  rates  have 
been  accurately  set  and  have  been  maintained,  and  where  a 
correct  understanding  existed  between  employer  and  employee. 
There  are  many  cases  where  it  can  be  used  to  advantage,  but 
its  success  will  depend  on  a  careful  observance  of  the  advantages 
and  disadvantages  noted  above. 

1  See  Piece  Work  Not  Necessary  For  Best  Work  In  The  Machine  Shop,  by 
James  O'Connell,  President  International  Association  of  Machinists,  Engineer- 
ing Magazine,  Vol.  19,  1900,  p.  373. 


178    PRINCIPLES   OF   INDUSTRIAL   ORGANIZATION 

CONTRACT  SYSTEM. 

102.  In  some  of  the  ship-yards,  locomotive  works  and  similar 
industries,  both  in  Great  Britain  and  America,  a  method  known 
as  the  contract  system  or  contract  plan  is  in  use  to  a  considerable 
extent.     Under  this  system  the  employer  contracts  with  a  gang 
boss  to  do  a  certain  part  of  the  work,  as  the  building  of  a  mast, 
the  assemblying  of  the  valve  gear  of  a  locomotive,  or  some  sim- 
ilar comprehensive  detail  that  may  involve  the  employment  of 
several  workmen  of  various  degrees  of  skill.     The  employer  fur- 
nishes all  materials  and  tools  and  the  contractor  provides  his 
own  workmen,  paying  them  either  by  piece  work  or  day  work 
as  they  may  agree  between  them.     To  the  owner,  therefore,  the 
plan  is  simple  piece  work;  while  to  the  workman  it  may  be  either 
day  work  or  piece  work. 

The  advantages  to  the  employer  are  obvious.  He  secures  a 
definite  cost  on  his  product  and,  apparently,  has  the  burden  of 
labor  disputes  lifted  from  his  shoulders.  The  contractor  and  his 
men  have,  however,  little  interest  in  the  upkeep  of  the  tools,  and 
the  wear  and  tear  on  equipment  is  likely  to  be  heavy  under  this 
system.  The  condition  of  the  workman  under  this  method  may 
or  may  not  be  advantageous,  depending  on  the  contractor,  and 
while  the  plan  has  worked  well  in  many  places,  the  underlying 
principles  cannot  be  said  to  be  good,  as  it  admits  of  the  sweat- 
shop methods  that  have  followed  in  its  wake  when  used  in  call- 
ings such  as  the  clothing  trade. 

THE  HALSEY  PREMIUM  PLAN. 

103.  General  Features.     The  Halsey  Premium  Plan  l  was  the 
first  of  the  modern  gain-sharing  plans  and  is  a  well  thought  out 
effort  to  meet  some  of  the  difficulties  of  day  work  and  piece  work 
already  noted.     It  is  especially  important  as  it  was  the  pioneer2 

1  See  The  Premium  Plan  of  Paying  For  Labor,  by  F.  A.  Halsey,  Trans. 
A.S.M.E.,  Vol.  12,  p.  755. 

2  This  is  true,  at  least,  so  far  as  modern  times  and  the  machine  industries 
are  concerned.     The  idea  seems  to  have  been  employed,  however,  in  earlier 
days  in  other  industries,  but  such  use  as  was  made  of  it  had  made  little  impres- 
sion on  wage  systems  in  general.     See  also  Rational  Management  by  A.  H. 
Church,  Engineering  Magazine,  April,  1913,  p.  29. 


THE   COMPENSATION  OF  LABOR  179 

in  a  new  method  of  rewarding  labor.  Under  this  plan  it  is  op- 
tional with  the  workman  whether  he  elects  to  work  on  the  pre- 
mium plan  or  not  and  his  day's  pay  is  assured  to  him  whether 
he  earns  a  premium"  or  not,  provided,  of  course,  that  he  is  not  so 
incompetent  as  to  be  undesirable.  Under  this  plan  a  standard 
time,  based  on  previous  experience,  is  allowed  for  the  work  in 
question.  For  every  hour  that  the  workman  can  shorten  this 
time  he  is  paid  a  fraction  of  his  hourly  wage  as  a  premium.  In 
Mr.  Halsey's  original  illustration  the  fraction  selected  is  one- 
third;  but,  as  he  points  out,  this  is  a  question  that  must  be  set- 
tled by  good  judgment.  In  practice  it  varies  from  one-quarter 
to  one-half  of  the  hourly  wage.  Thus,  suppose  a  job  normally 
requires  ten  hours  to  complete,  and  the  workman's  pay  is  $3.00 
for  the  ten  hours.  If  he  can  reduce  the  time  of  the  work  to 

2  X  30 

eight  hours  his  premium  will  be  ; — - —  =  20  cents  and  his  earn- 

o 

ings  for  the  eight  hours  will  be  (8  X  .30)  +  .20  =  $2.60.  or  at 
the  rate  of  $3.25  per  day  of  ten  hours.  The  labor  cost  to  the 
employer  is,  therefore,  forty  cents  less  than  on  day  work.  Or 
suppose,  again,  that  as  in  Article  100  the  workman  is  paid  $3.00 
per  day  and  is  producing  normally  fifteen  bolts  daily.  If  under 
the  stimulus  of  the  premium  plan  he  produces  twenty  bolts  daily 
he  would  save  one-third  of  a  day  in  time  and  his  bonus  would  be 
(i  300)  =  331  centg)  tnus  making  his  daily  wage  $3.33|.  The 
labor  cost  per  bolt  would  also  fall  from  20  cents  each  to  16| 
cents.  On  the  other  hand  if  he  should  fail  to  make  fifteen  bolts 
he  would  still  receive  his  full  normal  day's  pay  of  $3.00.  The 
wages  and  costs  for  various  numbers  of  bolts  under  this  plan 
would,  thus,  be  as  shown  in  Table  5,  using  the  same  data  as  in 
Article  100,  and  making  the  premium  one-third  of  the  labor  value 
saved. 

104.  Advantages  and  Disadvantages.  Since  this  system  in- 
sures the  workman  his  full  day's  pay  it  is  easy  to  introduce.  No 
changes  are  needed  in  the  regular  shop  methods,  or  at  least  no 
conspicuous  changes,  and  the  workman  is  not  compelled  to  work 
for  a  premium  unless  he  so  desires.  Because  of  this  conciliatory 
characteristic  of  the  plan  it  is  in  more  extended  use  than  any 


180    PRINCIPLES   OF   INDUSTRIAL   ORGANIZATION 


TABLE  5.  —  EARNINGS  AND  COSTS  UNDER  HALSEY 
PREMIUM  PLAN. 


No.  of 
bolts. 

Material 
cost. 

Day 

wage. 

Premium. 

Workman's 
earnings. 

Machine 
rate. 

Total  shop 
cost. 

Cost  per 
bolt. 

10 

1.00 

3.00 

0 

3.00 

2.00 

6.00 

0.60 

15 

1.50 

3.00 

0 

3.00 

2.00 

6.50 

0.43^ 

20 

2.00 

3.00 

33£ 

3.33^ 

2.00 

7.33£ 

0.361 

30 

3.00 

3.00 

1.00 

4.00 

2.00 

9.00 

0.30 

40 

4.00 

3.00 

1.66f 

4.66-! 

2.00 

10.661 

0.26! 

50 

5.00 

3.00 

2.33£ 

5.33| 

2.00 

12.33^ 

0.24! 

other  gain-sharing  method.  It  is  simple  in  its  operation  and 
every  man  can  compute  just  what  his  premium  will  be.  The 
standard  times  are  posted  in  the  shop  and  each  man  by  keeping 
account  of  his  own  performances  can  readily  compute  his  own 
premium.  These  standard  times,  as  before  noted,  are  based  on 
previous  records  with  such  shortening  of  these  records  as  may 
seem  desirable  or  necessary.  However,  no  radical  shortening 
of  the  records  is  made  unless  new  methods  or  appliances  are  put 
in  operation. 

Under  this  plan  the  workman  does  not  obtain  the  entire  benefit 
of  the  gain  in  product  that  he  produces  as  he  does  in  straight 
piece  work.  There  are  two  logical  reasons  for  this.  First,  the 
employer  is  entitled  to  some  of  the  gain,  since  the  workman  in 
making  it  uses  the  tools  harder,  uses  more  power  and  other  inci- 
dentals. Secondly,  since  the  employer  is  obtaining  part  of  the 
gain  he  is  less  likely  to  reduce  the  premium  and  lower  the  work- 
man's earnings  as  in  piece  work. 

An  argument  often  advanced  against  the  plan  is  that  the  rates 
are  set  by  judgment  or  are  based  on  records  that  do  not  repre- 
sent the  workman's  full  capacity  and  that,  as  a  consequence,  the 
workman  easily  makes  large  premiums,  thus  tempting  the  em- 
ployer to  reduce  the  standard  time.  The  same  argument  holds 
against  piece  work  as  ordinarily  practiced.  In  the  light  of  more 
modern  advances  in  time  study  there  is  some  truth  in  this  crit- 
icism, but  there  is  no  reason  why  basic  rates  for  this  system  can- 
not be  based  on  so-called  scientific  time  studies.  On  the  other 


THE   COMPENSATION   OF   LABOR 


181 


hand  the  lowering  of  the  standard  time  much  below  previous 
records  makes  the  introduction  of  any  bonus  or  premium  plan 
more  difficult.  The  success  of  the  Halsey  plan  is  due  largely 
to  its  simplicity,  ease  of  introduction  and  fairness. 

105.  The  Rowan  Modification  of  the  Halsey  Premium  Plan. 
It  is  obvious  that  the  general  principle  involved  in  the  Halsey 
method  can  be  modified  and  varied  in  many  ways.  One  of  the 
best  known  of  these  modifications  is  that  of  Mr.  James  Rowan  l 
of  Glasgow,  Scotland.  In  this  plan  a  percentage  is  added  to 
the  day  rate,  this  percentage  being  computed  by  the  fraction 

Time  Saved 

,  or  expressed  as  an  equation 


Standard  Time 

Premium  =  Day  rate  for  time  consumed  X 


Time  Saved 
Standard  Time 


Thus,  if  the  standard  time  were  ten  hours  and  the  day  rate  $3.00 
and  the  workman  completed  the  job  in  eight  hours,  his  premium 
would  be  $2.40  X  T2o  =  -48  and  his  pay  for  the  piece  would  be 
$2.40  +  -48  =  $2.88  or  at  the  rate  of  $3.60  per  day.  Using  the 
same  data  as  in  the  other  systems  the  several  items  for  various 
rates  of  production  would  be  as  shown  in  Table  6.  Fifteen  bolts 
per  day  are  taken  as  a  standard  day  rate  production. 

TABLE  6.  —  EARNINGS  AND  COSTS  UNDER  ROWAN  PREM- 
IUM PLAN. 


No.  of 
bolts. 

Material 
cost. 

Day 

wage. 

Premium. 

Workman's 
daily 

Machine 
rate. 

Total  shop 
cost. 

Cost  per 
bolt. 

10 

1.00 

3.00 

0 

3.00 

2.00 

6.00 

0.60 

15 

1.50 

3.00 

0 

3.00 

2.00 

6.50 

0.43i 

20 

2.00 

3.00 

0.75 

3.75 

2.00 

7.75 

0.38| 

30 

3.00 

3.00 

1.50 

4.50 

2.00 

9.50 

0.31| 

40 

4.00 

3.00 

1.87| 

4.87£ 

2.00 

10.87£ 

0.27£ 

50 

5.00 

3.00 

2.10 

5.10 

2.00 

12.10 

0.24^ 

It  will  be  noted  that  under  this  plan  the  earnings  of  the  work- 
man can  never  exceed  twice  his  day  rate.     Tha  value  of  the 

1  See  A  Premium  System  of  Remunerating  Labor,   by  James  Rowan, 
Proceedings  of  Mechanical  Engineers,  (British),  1901,  p.  865. 


182     PRINCIPLES   OF   INDUSTRIAL   ORGANIZATION 

„.        -      , .         Time  Set  —  Time  Consumed 
controlling   fraction,  constantly 

Time  Set 

approaches  unity,  as  the  time  consumed  approaches  zero,  hence 
the  premium  can  never  exceed  the  day  rate  multiplied  by  unity 
and  therefore  the  earnings  can  never  be  more  than  twice  the  day 
rate.  It  also  pays  the  worker  more  liberally  for  the  earlier,  and 
hence  easier  gains,  but  makes  it  increasingly  difficult  to  make 
higher  gains,  thus  practically  discouraging  very  high  production. 
This  plan  of  computing  the  premium  differs  from  the  original 
Halsey  method  in  this  particular,  as  the  latter  places  no  limit  to 
the  continual  increase  of  earnings.  There  seems  to  be  no  more 
reason  for  limiting  earnings  than  for  limiting  production,  but 
the  plan  has  the  advantage,  if  it  may  be  so-called,  of  lessening 
the  employers'  desire  to  cut  the  basic  rates  as  production  and 
earnings  increase.  "This  plan  has  not  been  much  used  in  this 
country  though  in  extended  use  in  England. 

THE  TAYLOR  DIFFERENTIAL  PIECE-RATE. 

106.  General  Features.  All  the  pay  systems  previously  dis- 
cussed aim  to  secure  increased  production  simply  by  enlisting 
the  interest  of  the  workman  through  increased  compensation. 
None  of  these  methods  make  any  exhaustive  effort  to  find  out 
what  really  constitutes  a  fair  basis  for  a  day's  work,  and  with 
the  exception  of  the  straight  piece  work  plan,  none  of  them 
penalizes  the  workman  for  not  putting  forth  his  best  efforts.  The 
Halsey  premium  plan  paved  the  way,  however,  for  a  more  thor- 
ough study  of  the  problem,  and  the  proposal  of  more  refined 
methods.  Whether  these  new  methods  are  more  equitable,  and 
whether  they  will  come  into  extended  use  will  be  discussed  in  a 
later  chapter. 

The  first  of  these  new  methods  was  that  proposed  by  Mr.  F. 
W.  Taylor.1  Mr.  Taylor  began  his  investigation  by  ignoring 
all  records  based  on  previous  performances  and  studied  each 
operation  in  detail;  his  idea  being  to  find  the  best  method  of 
doing  each  detail  operation  and  the  minimum  time  that  should 

1  See  A  Piece  Rate  System,  by  F.  W.  Taylor,  Trans.  A.S.M.E.,  June,  1895. 


THE   COMPENSATION  OF  LABOR  183 

be  allowed  to  do  it.  He  has  shown  that  not  only  can  this  be 
done  by  expert  observers,  but  also  that  by  recording  the  results 
of  these  analytical  observations  for  various  operations  it  is  pos- 
sible to  build  up,  synthetically,  the  minimum  time  required  for 
other  jobs  involving  these  common  details  of  operation.  He  has 
shown,  also,  that  by  surrounding  the  workman  by  expert  ad- 
visors and  the  proper  equipment  he  can  be  taught  to  reach  the 
standard  performances  predicted  by  these  expert  observers. 
This  point  of  view  has  been  fully  discussed  in  Chapter  9.  This 
method,  then,  and  those  that  follow  presuppose  more  than  a 
change  in  the  pay  system;  they  involve  changes  in  management 
as  well. 

To  encourage  the  workman  to  reach  the  standard  of  perform- 
ance Mr.  Taylor  establishes  two  piece  rates,  a  high  piece  rate 
when  the  standard  is  attained,  and  a  low  piece  rate  when  the 
standard  is  not  attained.  Thus,  if  as  before,  the  standard  pro- 
duction is  30  bolts  per  day  the  piece  rate  for  that  output,  and 
beyond  it,  might  be  fifteen  cents  per  bolt;  but  for  any  produc- 
tion below  thirty  the  rate  might  be  ten  cents  per  bolt.  There 
is  every  incentive,  therefore  toward  maximum  production,  for 
the  workman  receives  not  only  a  high  piece  rate  if  he  reaches 
and  exceeds  the  standard,  but  receives  the  full  piece  rate,  per 
piece,  as  his  production  rises,  after  he  has  attained  the  standard 
performance  and  not  simply  a  portion  of  it  as  under  the  Halsey 
plan.  Mr.  Taylor's  plan  differs  from  the  Halsey  or  any  of  the 
preceding  plans  in  that  it  seeks  to  determine  definitely  just  how 
much  a  good  man  should  do  and  to  set  the  standard  so  that  only 
good  men  can  attain  the  higher  piece  rate  level,  but  liberally 
rewarding  those  that  can.  It  also  penalizes  the  poorer  worker 
in  greater  degree  than  is  done  in  straight  piece  work,  since  the 
lower  piece  rate  is  purposely  set  very  low  to  spur  the  man  to  try 
to  attain  the  higher  rate.  The  day  wage  is  not  assured  to  the 
worker  under  this  plan. 

To  make  an  approximate  comparison  with  other  methods 
suppose  that  analysis  shows  that  with  improved  facilities  thirty 
bolts  per  day  may  be  taken  as  a  fair  day's  work.  Suppose  also 
that  an  upper  rate  of  fifteen  cents  per  bolt  is  sufficient  incentive 


184    PRINCIPLES   OF   INDUSTRIAL   ORGANIZATION 

to  the  workman  to  meet  this  standard,  and  let  ten  cents  be  taken 
as  the  lower  rate.  It  will  be  fair  to  assume  that  the  machine  rate 
will  be  increased  to  say  $2.50  because  of  the  more  expensive 
planning  department  necessary.  Then  the  costs  and  earnings 
under  this  system  will  be  as  shown  in  Table  7  following: 

TABLE  7.  — EARNINGS  AND  COSTS  UNDER  TAYLOR  DIF- 
FERENTIAL PIECE-RATE. 


No.  of 
bolts. 

Mater- 
ial cost. 

Day  wage. 

Piece 

rate. 

Workman's 
daily 
earnings. 

Machine 
rate. 

Total 
shop  cost. 

Cost  per 
bolt. 

10 

1.00 

Not  assured 

10 

1.00 

2.50 

4.50 

0.45 

15 

1.50 

U                  ( 

10 

1.50 

2.50 

5.50 

0.36? 

20 

2.00 

it             < 

10 

2.00 

2.50 

6.50 

0.32$ 

30 

3.00 

(I                  ( 

15 

4.50 

2.50 

10.00 

0.33$ 

40 

4.00 

u            ( 

15 

6.00 

2.50 

12.50 

0.31} 

50 

5.00 

«               ( 

15 

7.50 

2.50 

15.00 

0.30 

107.  Advantages  and  Criticisms.  The  Taylor  differential 
piece-rate  recognizes  very  fully  that  low  wages  do  not  mean  cheap 
product.  Thus,  in  the  above  example,  the  cost  at  twenty  bolts 
per  day  is  as  great  as  at  forty  bolts  per  day.  It  is  evident,  how- 
ever, that  in  order  to  reduce  the  price  and  at  the  same  time  pay  a 
high-piece  rate  a  large  quantity  must  be  produced.  Thus  the  cost 
per  bolt  at  a  production  of  thirty  per  day  is  slightly  less  under 
the  33|  per  cent  Halsey  plan  than  under  the  Taylor  system  with 
the  data  l  taken.  However,  under  Taylor's  method  of  expert 
analysis,  prediction  and  preparation  the  good  workman  has  more 
chance  of  reaching  this  high  output  than  under  the  Halsey  plan 
that  depends  on  the  initiative  of  the  workman  alone.  The  Tay- 
lor plan  aims  to  determine  just  what  the  maximum  product 
should  be  under  best  conditions,  leaving  nothing  to  the  worker's 
initiative,  but  paying  him  a  good  rate  to  insure  his  cooperation. 
The  criticism  usually  made  of  the  Taylor  system  is  that  it  takes 
away  the  workman's  initiative  and  tends  to  make  an  automaton 
of  him.  While  this  may  seem  to  be  the  immediate  effect  upon 

1  The  data  selected  for  the  several  tables  are  what  might  well  be  expected 
in  practice.  Accurate  comparison  of  the  systems  cannot,  however,  be  drawn 
from  these  data  as  the  basic  rates  may  be  varied  so  widely. 


THE   COMPENSATION  OF  LABOR  185 

skilled  workmen  the  ultimate  effect  of  this  method  would  be  no 
different  from  that  of  the  introduction  of  any  labor-saving  device 
or  any  division  of  mental  labor  from  manual  labor.  All  such 
influences  tend  to  subdivide  and  reclassify  labor,  putting  the 
planning  into  the  hands  of  the  more  able  and  the  actual  execution 
into  the  hands  of  the  less  able.  The  Taylor  system  is  a  very  able 
analysis  of  the  theory  of  division  of  labor,  both  mental  and 
manual.  To  what  extent  it  may  come  into  use  will  depend  on 
grounds  other  than  those  already  considered. 

It  is  objected  also  that  the  method,  by  measuring  accurately 
a  man's  capacity  for  work,  puts  into  the  hands  of  the  employer 
an  enormous  power  that  he  hitherto  has  not  possessed.  This 
also  is  true,  but  is  no  argument  against  such  accurate  measure- 
merit.  There  is  no  reason  why  an  employer  should  not  know 
just  what  value  he  is  purchasing  in  labor  as  he  does  in  buying 
material.  He  must  not,  however,  be  allowed  to  use  this  power 
unjustly.  Clearly,  rates  could  be  set  by  this  method  that  would 
exclude  all  but  the  very  best  men  from  participating  in  industry, 
and  because  of  the  increased  product  the  market  demand  could 
be  filled.  It  is  questionable,  to  say  the  least,  whether  it  is  better 
to  have  production  concentrated  in  the  hands  of  a  few  or  to  have 
every  man  producing  as  efficiently  as  he  can  and  being  paid 
accordingly. 

THE  GANTT  BONUS  PLAN. 

108.  General  Features.  It  is  evident  that  the  differential 
piece-rate  is  a  difficult  one,  in  general,  to  introduce  because  of  the 
fear  on  the  part  of  the  workman  that  he  cannot  attain  the  higher 
rate  and  is,  therefore,  condemned  to  a  lower  wage  and  ultimate 
dismissal.  Mr.  H.  L.  Gantt,1  a  former  associate  of  Mr.  Taylor, 
has  devised  a  plan  that  obviates  this  difficulty  and  yet  holds  out 
the  reward  of  good  performance.  Like  Taylor,  Gantt  makes 
a  very  careful  study  of  the  work  and  conditions,  and  determines 
just  what  a  good  standard  performance  should  be  under  the  best 
conditions  that  he  can  establish.  On  the  basis  of  these  observa- 

1  See  Trans.  A.S.M.E.,  Vol.  23,  1902,  p.  341;  also  Work  Wages  and  Profits, 
by  H.  L.  Gantt. 


186     PRINCIPLES   OF   INDUSTRIAL   ORGANIZATION 

tions  a  definite  task  for  a  given  time  is  set,  and  if  the  worker  can 
accomplish  this  task  he  receives  a  bonus  in  the  form  of  an  extra 
time  allowance,  usually  from  25  to  50  per  cent  of  the  time  al- 
lowed for  the  task;  hence  the  name  task  and  bonus  which  is 
associated  with  this  plan. 

If  the  workman  fails  to  accomplish  the  task  he  receives  only  his 
day  rate,  which  is  guaranteed  to  him.  The  plan,  therefore,  has 
the  good  features  of  the  Halsey  plan  in  insuring  the  day  rate, 
and  hence  makes  it  easy  of  introduction,  and  embodies,  also, 
the  good  features  of  the  Taylor  plan  in  that  it  makes  a  high 
rate  of  production  possible  and  offers  a  great  inducement  for 
high  performance. 

To  illustrate,  suppose  that  as  in  the  previous  example  of  the 
Taylor  method,  the  standard  performance  is  thirty  bolts  daily, 
and  that  the  day  rate  is  $3.00  as  before.  Suppose,  also,  that 
the  bonus  is  33j  per  cent  of  the  time  allowed.  Then  the  time 
allowed  for  one  bolt  is,  therefore  .333  hours.  If  the  workman 
makes  just  thirty  bolts  per  day  he  earns  a  bonus  and  is  given 
credit  for  (10  +  Y")  =  13.33  hours,  which  at  thirty  cents  per 
hour  is  $4.00  per  day.  If  he  does  not  make  the  thirty  bolts  he 
does  not  earn  a  bonus  and  his  pay  is  at  the  day  rate  of  $3.00.  If, 
on  the  other  hand,  he  should  exceed  the  task  and  make  forty 
bolts  he  would  be  given  the  time  allowed  for  forty  bolts  plus  a 
premium  of  one-third  that  time.  Thus,  the  time  allowed  for 
forty  bolts  is  .333  X  40  =  13.33  hours,  the  premium  would  be 

13  33 

; —  =  4.44  hours  and  the  worker's  daily  earnings  would  be 
3 

(13.33  +  4.44)  X  .30  =  $5.33.  Table  8  shows  the  earnings 
and  costs  under  the  Gantt  bonus  system  for  the  same  data  as 
has  been  assumed  for  the  previous  examples. 

A  study  of  columns  one  and  five  will  show  that  this  system 
gives  day  pay  when  the  bonus  is  not  earned  and  piece  work  pay 
when  the  bonus  is  earned.  In  the  example  given,  for  instance, 
the  day  pay  is  $3.00  and  the  piece  rate  is  13.3  cents. 

109.  Advantages  and  Disadvantages.  As  before  noted  this 
plan  is  easy  to  introduce  and  it  is  humane  in  its  operation.  Under 
Mr.  Gantt's  methods  special  attention  is  given  to  the  training 


THE   COMPENSATION  OF  LABOR 


187 


TABLE  8.  —  EARNINGS  AND  COSTS  UNDER  THE  GANTT 
BONUS  PLAN. 


No.  of 
bolts. 

Material 
cost. 

Day 

wage. 

Bonus. 

Workman's 
daily 
earnings. 

Machine 
rate. 

Total  shop 
cost. 

Cost  per 
bolt. 

10 

1.00 

3.00 

0 

3.00 

2.50 

6.50 

0.65 

15 

1.50 

3.00 

0 

3.00 

2.50 

7.00 

0.461 

20 

2.00 

3.00 

0 

3.00 

2.50 

7.50 

0.37£ 

30 

3.00 

3.00 

1.00 

4.00 

2.50 

9.50 

0.311 

40 

4.00 

3.00 

1.33 

5.33 

2.50 

11.83 

0.29| 

50 

5.00 

3.00 

1.66 

6.66 

2.50 

14.16 

0.28i 

of  the  workmen,  both  in  the  skill  necessary  to  earn  the  bonus  and 
also  in  habits  of  industry.1  A  careful  study  is  made  of  all  the 
conditions,  all  obstacles  are  removed  and  every  assistance  is 
given  to  the  worker  that  may  help  him  to  earn  the  bonus.  The 
task  must  necessarily  be  set  high  since  the  output  must  be  large 
to  greatly  reduce  the  unit  cost,  and  since  the  bonus  is  large  and 
the  workman  gets  all  the  apparent  gain.  A  further  incentive  to 
production  is  provided  by  giving  a  bonus  to  the  foreman  when  a 
given  proportion  of  men  under  him  earn  their  bonus.  This 
encourages  the  foreman,  not  only  to  teach  the  men  all  he  can, 
but  to  keep  all  obstacles  from  before  them.  The  system  has 
undoubted  merit,  and  under  Mr.  Gantt's  direction  it  has  been 
very  successful  in  many  plants.  It  does,  however,  like  the 
Taylor  plan,  divide  the  workers  into  two  classes,  those  that 
can  earn  a  bonus  and  those  that  cannot,  and  this  feature  has 
been  criticised.  It  is  questionable,  however,  if  this  effect  is  any 
greater  than  the  necessary  difference  in  wages  that  must  always 
exist  where  men  are  paid  on  merit. 

THE  EMERSON  EFFICIENCY  PLAN. 

110.  General  Features.  The  Emerson2  efficiency  plan,  while 
aiming  to  attain  the  same  results  as  the  systems  already  dis- 
cussed, proceeds  on  a  principle  somewhat  different  from  any  of 


1  See  Work  Wages  and  Profits,  p.  115. 

2  See  Efficiency,  by  Harrington  Emerson. 


188    PRINCIPLES   OF   INDUSTRIAL   ORGANIZATION 


them,  though  some  features  of  the  plan  are  similar  to  some  fea- 
tures of  these  other  methods.  Like  the  Halsey  and  Gantt  sys- 
tems, Emerson  assures  the  workman  his  day  wage.  Like  Taylor 
and  Gantt,  he  makes  a  careful  study  of  the  details  of  production 
and  establishes  a  standard  performance  that  represents  a  full  and 
fair  task  for  the  worker.  For  the  attainment  of  this  standard 
a  large  bonus  is  offered,  as  in  the  Gantt  method,  but  smaller 
bonuses  may  be  earned  before  reaching  this  standard,  thus 
agreeing  in  a  way  with  the  Halsey  plan. 

To  make  this  method  clear  suppose  that  a  job  is  standardized 
at  120  hours.  If  the  workman  performs  the  task  in  120  hours 
his  efficiency  is  said  to  be  100  per  cent.  If  he  takes  240  hours 
his  efficiency  is  50  per  cent.  If  he  takes  only  100  hours  his 
efficiency  is  120  per  cent  and  so  on.  No  bonus  is  paid  the  worker 
unless  his  efficiency  reaches  66f  per  cent,  but  he  receives  only 
his  day  pay.  At  this  point  he  receives  a  very  small  bonus,  but 
the  bonus  increases  as  his  performance  rises  till  at  100  per  cent 
efficiency  he  receives  20  per  cent  of  his  day  wage  as  a  bonus. 
For  greater  performance  greater  bonuses  are  paid  till  at  140  per 
cent  efficiency  the  worker  receives  60  per  cent  of  his  wages  as  a 
bonus.  The  bonus  rates  for  the  several  efficiencies  are  given 
below  in  Table  9,  from  which  it  will  be  seen  that  the  bonus  for 
the  lower  efficiencies  is  very  small  but  increases  rapidly  as  the 
efficiency  rises. 

TABLE  .9.  —  EMERSON  BONUS  RATES. 


Effi- 

Effi- 

ciency 

Bonus  per 

ciency 

Bonus  per 

Efficiency 

Bonus  per 

Efficiency 

Bonus  per 

per 

$1.00  wages. 

per 

$1.00  wages. 

per  cent. 

$1.00  wages. 

per  cent. 

$1.00  wages. 

cent. 

cent. 

67 

0.0001 

78 

0.0238 

88 

0.0832 

99 

0.1881 

68 

0.0004 

79 

0.0280 

89 

0.0911 

100 

0.20 

69 

0.0011 

80 

0.0327 

90 

0.0991 

101 

0.21 

70 

0.0022 

81 

0.0378 

91 

0.1074 

102 

0.22 

71 

0.0037 

82 

0.0433 

92 

0.1162 

103 

0.23 

72 

0.0055 

83 

0.0492 

93 

0.1256 

105 

0.25 

73 

0.0076 

84 

0.0553 

94 

0.1352 

110 

0.30 

74 

0.0102 

85 

0.0617 

95 

0.1453 

120 

0.40 

75 

0.0131 

86 

0.0684 

96 

0.1557 

130 

0.50 

76 

0.0164 

87 

0.0756 

97 

0.1662 

135 

0.55 

77 

0.0199 

87.5 

0.0794 

98 

0.1770 

140 

0.60 

THE  COMPENSATION   OF  LABOR 


189 


In  the  practical  operation  of  this  method  by  Mr.  Emerson  the 
bonus  is  calculated  monthly  and  not  for  individual  jobs.  Thus, 
if  a  man's  wages  are  $0.30  per  hour,  and  if  during  a  given  month 
he  has  worked  240  hours,  doing  in  that  time  jobs  whose  total 

210 


standard  times  have  been  set  at  210  hours,  his  efficiency  is 


240 


87.5.  His  wages  are  $72,  his  bonus  (see  table)  is  7.94  per  cent 
of  his  wages,  or  $5.72,  and  his  earnings  $77.72.  The  advantage 
of  this  monthly  award  is  that  it  tends  to  make  the  worker  de- 
sirous of  making  a  bonus  on  every  job  since  the  averaging  in  of 
a  number  of  poor  performances  with  a  few  good  ones  would,  in 
all  probability,  mean  the  loss  of  any  bonus  that  he  may  have 
earned  on  these  good  performances. 

To  make  an  approximate  comparison  with  the  other  systems 
let  the  standard  performances  as  before  be  30  bolts  and  the  day 
wage  $3.00;  then  the  earnings  and  costs  under  the  Emerson  plan 
are  as  given  in  Table  10. 

TABLE  10.  —  EARNINGS  AND  COSTS  UNDER  EMERSON 

PLAN. 


No.  of 

bolts. 

Mater- 
ial cost. 

Day 

wage. 

Effi- 
ciency 
per  cent. 

Bonus. 

Workman's 
daily 
earnings. 

Machine 
rate. 

Total  shop 
cost. 

Cost  per 
bolt. 

10 

1.00 

3.00 

0.33^ 

0 

3.00 

2.50 

6.50 

0.65 

15 

1.50 

3.00 

0.50 

0 

3.00 

2.50 

7.00 

0.46| 

20 

2.00 

3.00 

0.661 

0.03 

3.03 

2.50 

7.53 

0.37£ 

30 

3.00 

3.00 

100 

0.60 

3.60 

2.50 

9.10 

0.30| 

40 

4.00 

3.00 

133J 

1.59 

4.59 

2.50 

11.09 

0.27| 

As  in  all  bonus  systems  where  the  workman  receives  a  large 
part  of  the  apparent  gain,  the  output  must  be  large  in  order  to 
reduce  the  cost,  and  as  a  consequence,  the  standard  performance 
must  be  set  so  high  that  only  the  best  men  can  attain  it.  The 
system  is,  therefore,  selective  in  its  operation  though  not  so 
markedly  so  as  the  Gantt  and  Taylor  systems  since  there  is 
some  provision  made  for  all  men  that  can  attain  an  efficiency  of 
66f  per  cent. 


190     PRINCIPLES   OF    INDUSTRIAL   ORGANIZATION 

RESUME. 

111.  It  is  difficult,  if  not  impossible,  to  draw  accurate  com- 
parisons between  the  several  methods  of  payment  discussed  in 
the  preceding  articled  because  of  the  different  foundations  on 
which  they  rest  and  the  widely  differing  practice  they  lead  to; 
and  the  tabulated  figures  given  for  each  method  must,  there- 
fore, be  taken  as  suggestive  rather  than  conclusive.  They  do, 
however,  make  it  possible  to  compare  these  systems  so  as  to 
show  clearly  the  relative  importance  they  may  possess  in  the 
eyes  of  the  employer  and  the  employee.  In  making  this  com- 
parison it  must  be  remembered  that  the  interests  of  these  two 
classes  of  men  are  not  always  the  same.  The  employer  naturally 
buys  labor  as  cheaply  as  he  can,  the  worker  naturally  sells  his 
labor  at  as  high  a  price  as  he  can  command.  The  employer 
wishes  large  output;  the  worker  is  in  general  not  interested  in 
increasing  his  output  unless  his  compensation  increases  accord- 
ingly. Mr.  Taylor  says  1  that  in  order  to  induce  men  to  put 
forth  their  best  efforts  it  is  necessary  to  pay  laborers  from  30 
to  60  per  cent  more  than  the  average  of  their  class;  ordinary 
mechanics  from  70  to  80  per  cent  more  than  the  average  of  their 
class;  and  for  work  requiring  skill,  brains,  close  application  and 
bodily  exertions,  as  high  as  100  per  cent  extra  compensation  is 
needed.  This  statement  is,  in  general,  undoubtedly  true.  The 
fact  that  increased  output  eventually  benefits  not  only  the  em- 
ployer but  also  the  employee  has  little  or  no  influence  on  the 
worker.  He  is  not  willing,  and  justly,  to  forego  present  profits 
for  the  sake  of  prospective  gains  that  are,  after  all,  somewhat 
problematic  and  uncertain.  Hence  he  wishes  as  high  a  wage  as 
he  can  obtain  regardless  of  output;  in  fact,  he  is  inclined  to  look 
upon  increased  output  with  distrust  as  leading  to  a  full  market 
with  a  resulting  drop  in  labor  values. 

The  employer  also  desires  low  unit  costs.  If  he  can  obtain 
this  and  also  obtain  great  output  his  position  is  very  favorable. 
However,  there  is  a  great  advantage  in  large  output  even  if  the 
shop  costs  do  not  materially  change ;  since  the  greater  his  output 

i  Trans.  A.S.M.E.,  Vol.  24,  1903,  p.  1346. 


THE   COMPENSATION  OF  LABOR  191 

per  dollar  of  investment  the  greater  is  his  percentage  of  profit 
for  a  given  gain  per  piece  sold.  Clearly,  it  is  more  profitable  to 
sell  one  thousand  pieces  per  month  than  to  sell  only  one,  the 
gain  per  piece  being  the  same  in  both  cases.  A  wage  system, 
therefore,  that  will  stimulate  output  even  though  it  does  not 
materially  reduce  the  unit  cost,  is  a  desirable  matter. 

In  comparing  these  new  wage  systems  with  day  work  it  would 
seem  fair  to  consider  day  work  at  its  best  and  not  to  compare 
them  to  day  work  where  the  worker  is  producing  a  small  fraction 
of  what  he  is  capable  of.  Such  conditions,  are,  perhaps,  too 
common,  but  they  are  due  more  to  defects  in  management  than 
in  the  principle  of  day  work.  It  would  not  seem  to  be  unfair 
to  consider  that  the  worker  on  day  pay  is  producing  three-fifths 
of  what  he  is  capable  of  under  the  existing  conditions.  Hence, 
in  the  illustration  cited  (Art.  100)  where  fifteen  bolts  are  pro- 
duced daily,  twenty  bolts  may  be  taken  as  a  maximum  perform- 
ance under  the  existing  conditions  and  surroundings,  provided 
the  worker  receives  a  financial  stimulus  sufficient  to  insure  his 
maximum  effort,  or  such  as  he  can  put  forth  continually  without 
injury  to  himself. 

In  Fig.  16  the  line  ACK  represents  the  worker's  hourly  pay 
for  any  hourly  output  whatever  at  30  cents  per  hour;  one  and 
one-half  per  hour  or  fifteen  bolts  daily  being  considered  a  good 
day's  work.  If  now  the  worker  is  put  on  piece  work  at  a  rate 
equivalent  to  his  day  work  performance,  or  20  cents  per  bolt,  his 
earnings  will  be  represented  by  the  line  OB,  and  when  he  reaches 
the  maximum  attainable  performance  of  twenty  bolts  per  day 
or  two  per  hour  his  hourly  rate  rises  to  40  cents.  (If  he  has  been 
working  far  below  his  capacity  his  output  may  rise  very  high, 
indeed,  comparatively,  but  if  it  does  so  rise  the  inevitable  cut 
in  rate  quickly  follows.)  Should  he  fail  to  produce  fifteen  bolts, 
his  decreased  earnings  would  be  represented  by  OC. 

Since  the  Halsey  system  and  all  its  modifications,  as  illustrated 
by  the  Rowan  plan,  are  not  based  on  changes  in  surrounding 
conditions  or  facilities,  it  would  not  be  expected  that  they  could 
stimulate  the  output  beyond  that  attainable  by  piece  work. 
The  advantage  of  this  system  is  that  it  insures  the  workman  his 


192     PRINCIPLES   OF   INDUSTRIAL   ORGANIZATION 


day  rate  and  under  these  methods  his  curves  of  earnings  are 
ACPG  and  ACDH  respectively,  and  both  of  these  curves  lie 
below  the  piece  work  curve,  hence  the  remuneration  per  piece 
is  less  by  these  methods  than  by  the  piece  work  plan.  They  are, 


0.5 


1.0 


1.5          2.0  2.5  3.0 

Number  of.  Pieces  per  Hour 

FIG.  16. 


3.5 


4.0 


4.5 


6.0 


however,  much  more  likely  to  secure  the  maximum  product  of 
twenty  pieces  since  they  insure  the  day  rate  and  workmen  may 
look  upon  them  with  less  distrust. 

The  Taylor,  Gantt  and  Emerson  methods  proceed  on  the  gen- 
eral principle  that  not  only  does  increased  compensation  stimu- 


THE   COMPENSATION  OF  LABOR  193 

late  the  output  but  that  still  greater  gains  can  be  made  by  making 
the  conditions  surrounding  the  workman  the  very  best  and  by 
instructing  him  in  the  very  best  method  of  procedure.  It  has 
been  assumed  in  this  case  that  these  methods  will  increase  the 
output  100  per  cent  or  to  thirty  bolts  daily.  Then  the  pay  of 
the  worker  under  these  several  methods  is  fairly  well  represented 
by  the  lines  ONDE,  ACNPM  and  ACF,  respectively.  It  is 
assumed  that  the  piece  rate  under  the  Gantt  system  may  be 
somewhat  lower  than  under  the  Taylor  system  in  order  to  pro- 
duce the  same  incentive,  since  the  Taylor  plan  does  not  insure 
day's  pay.  The  lines  OC  and  ON  measure  rates  of  pay  below 
the  standard  wage  of  30  cents,  but  the  Halsey,  Rowan,  Gantt 
and  Emerson  curves  and  that  part  of  the  Taylor  curve  that 
measures  earnings  above  30  cents  per  hour  lay  between  the 
straight  piece  work  curve  CB  and  the  day  rate  curve  CK.  That 
is,  the  reward  of  the  worker  is,  in  general,  greater  on  piece  work 
and  less  on  day  work  than  by  any  of  the  other  pay  systems  for 
all  outputs  above  the  standard  rate  of  fifteen  pieces  per  day. 
This  is  necessarily  so  in  the  Halsey  and  Rowan  plans  from  their 
very  nature.  It  is  true  of  the  other  plans  because  the  great 
increase  in  output  under  these  new  methods  is  due  only  in  part 
to  increased  remuneration  (the  effect  of  which  has  already  been 
shown  to  have  limitations)  and  in  greater  part  to  the  extended 
division  of  labor  under  these  methods  and  the  assistance  given 
the  worker.  The  latter  is,  therefore,  not  entitled  to  a  propor- 
tionate reward  as  in  straight  piece  work  and  if  he  were  it  could 
not  be  paid  without  increasing  the  unit  costs  above  piece  work 
costs  since  the  planning  of  the  work  and  the  training  of  the  work- 
men under  the  new  systems  are  items  of  expense  that  must  be 
included  in  the  costs.  It  is  clear,  however,  that  these  more 
advanced  methods  of  rewarding  labor  are  effective  in  raising 
the  output  and  at  the  same  time  paying  higher  wages  than  could 
be  paid  under  ordinary  day  or  piece  work,  at  the  same  time 
keeping  the  costs  as  low,  if  not  lower,  than  when  the  increased 
output  is  obtained  by  financial  stimulation  alone. 

It  is  obvious  that  the  cost  per  bolt  for  a  large  output  will  be 
less  under  day  work  than  under  any  of  these  methods  that  pay 


194    PRINCIPLES   OF  INDUSTRIAL  ORGANIZATION 


higher  rates  for  higher  output,  and  it  is  also  clear  that  the  unit 
cost  will  be  less  under  the  Halsey  plan  and  its  modifications  than 
under  piece  rates,  since  the  worker  receives  a  portion  only  of  the 
gain  accruing  from  his  increased  activity.  The  effect  of  the 
Taylor,  Gantt  and  Emerson  systems  on  unit  cost  is  not  so  clear, 
and  the  assumption  so  often  made  that  increased  output  neces- 
sarily means  decreased  unit  cost  is  not  warranted  except  when 
other  factors  remain  constant.  The  increased  output  under 
these  methods  is  due  as  before  stated  to  the  incentive  of  high 
wages  and  to  a  detailed  planning  of  the  work  accompanied  by 
expert  advice  to  the  worker.  The  cost  of  this  last  feature  may 
make  a  large  addition  to  the  shop  burden  and,  therefore,  the 
unit  wage  cost  is  not  a  correct  measure  of  the  total  unit  cost. 
In  the  examples  cited  it  was  assumed  that  an  increase  of  100  per 
cent  in  output  could  be  obtained  by  these  advanced  methods 
with  an  increase  in  the  machine  rate  of  25  per  cent,  which  would 
seem  to  be  conservative.  To  make  comparison  easier  the  unit 
costs  under  each  method  (i.e.,  the  last  column  in  each  of  the 
foregoing  tables  of  cost  and  earnings)  are  tabulated  in  Table  11. 

TABLE  11.— COMPARISON  OF  COSTS  UNDER  VARIOUS 
SYSTEMS. 


Number  per  day. 

Cost  per  bolt  in  cents. 

10 

15 

20 

30 

40 

50 

20 
34 

241 
24^ 
30 
28* 

Day  work 

60 

50 
60 
60 
45 
65 
65 

43', 
43| 

433L 
43i 
361 
46! 
46| 

35 
40 
36| 
38| 

32^ 

m 

38 

261 
361 
30 
31! 
33^ 
31§ 
30| 

22| 
35 
26f 
27| 
3l| 
29| 
27| 

Piece  work 

Halsey  premium  .  . 

Rowan  premium  .  . 

Taylor  piece 

Gantt  bonus 

Emerson  efficiency         

The  black  faced  figures  in  the  table  denote  the  costs  for  the 
highest  probable  output  under  each  system.  It  will  be  noted 
that  in  each  case  the  cost  for  day  work  is  lower,  and  for  piece 
work  higher  than  for  any  other  system  except  in  the  smaller 
outputs  where  some  of  the  advanced  systems  naturally  give 


THE   COMPENSATION  OF  LABOR  195 

higher  costs  because  of  increased  shop  burden.  But  it  is  evi- 
dent that  if  the  remuneration  or  the  added  shop  burden  in  the 
Gantt,  Taylor  or  Emerson  systems  should  be  much  more  than 
what  has  been  allowed,  the  reduction  in  cost  over  simpler  systems 
would  be  problematic.  However,  it  should  again  be  noted  that 
even  when  there  is  no  reduction  in  cost  the  gain  in  output  is 
highly  important  and  desirable. 

As  previously  stated  these  mathematical  statements  must  be 
taken  as  approximate  and  as  indicating  general  principles  only. 
They  are  such,  however,  as  might  occur  and  may,  therefore, 
assist  in  visualizing  the  relations  that  exist  between  these  much 
discussed  methods.  Of  course  each  shop  is  a  problem  by  itself 
and  a  method  that  may  be  satisfactory  in  one  may  not  work  at 
all  in  another.  It  is  also  obvious  that  an  infinite  number  of 
pay  systems  can  be  devised  along  the  lines  of  the  advanced 
methods  discussed.  The  importance  of  these  new  methods 
does  not  lie  so  much  in  the  fact  that  they  assist  in  securing  greater 
output  at  lower  cost  and  higher  wages,  as  in  the  tendencies  that 
they  portend.  It  really  does  not  matter  very  much  what  pay 
system  is  used  so  long  as  it  is  just  to  employer  and  employee, 
insuring  to  the  one  full  value  for  his  money,  and  rewarding  the 
other  fully  for  his  effort. 

There  are,  however,  two  very  important  features  involved 
in  these  new  methods  that  deserve  more  than  passing  thought. 
Under  the  older  system  of  day  work  it  is  necessary  in  most  cases 
to  drive  the  worker  in  order  to  obtain  his  best  efforts.  Under 
piece  work  this  is  not  necessary,  but  the  worker  has  to  take 
chances  against  losses  sometimes  beyond  his  control,  and  this 
he  is  not  inclined  to  do  and  often  cannot  afford.  The  newer 
methods  frankly  recognize  that  men  must  be  paid  for  extra 
exertion,  and  this  is  a  step  in  the  right  direction  away  from 
slave-driving  methods. 

The  other  feature  is  even  more  important.  Under  day  work, 
piece  work,  and  to  a  large  extent  under  the  Halsey  plan,  the 
conditions  of  production  are  not  changed  where  added  incen- 
tive is  given  to  production.  Under  the  Taylor,  Gantt  and 
Emerson  methods  radical  changes  are  involved,  affecting  not 


196     PRINCIPLES   OF   INDUSTRIAL   ORGANIZATION 

only  the  equipment  but  the  workman  himself.  The  intro- 
duction of  the  planning  department,  functional  foremanship 
and  other  features  of  advanced  management  so  closely  connected 
with  these  modern  pay  systems,  portend  a  much  further  appli- 
cation of  division  of  labor  than  heretofore  contemplated.  The 
effect  of  these  changes  on  the  workman  will  be  marked,  as  these 
influences  tend  to  disintegrate  still  further  the  trades  and  to 
reclassify  workers  into  new  groups.  Mr.  Taylor 1  expressed 
this  idea  very  clearly  when  he  said  —  "  The  full  possibilities  of 
functional  foremanship,  however,  will  not  have  been  fully  realized 
until  almost  all  of  the  machines  in  the  shop  are  run  by  men  who 
are  of  smaller  calibre  and  attainments  and  who  are,  therefore, 
cheaper  than  those  required  under  the  old  system."  The  new 
wage  systems  are,  therefore,  closely  tied  up  with  radical  changes 
in  management  and  are,  in  a  way,  not  comparable  with  old 
methods  in  their  ultimate  effect  on  the  workman. 

Furthermore,   the   new   methods   approach   the   problem   of 
remuneration  from  a  new  view  point.     Labor  is  measured  ex- 
actly, all  obstacles  are  removed  as  far  as  possible,  and  the  worker 
is  expected  to  reach  a  predetermined  performance  in  exactly 
the  same  way  in  which  a  scientific  farmer  determines  the  effi- 
ciency of  a  cow  or  the  output  of  a  hen.     This,  in  itself,  is  not  of\ 
importance;    but  if  these  methods  are  to  be  used  as  a  means  of  J 
eliminating  all  that  fall  below  a  given  standard  it  opens  up  a  grave^ 
and  perplexing  problem.     In  the  case  of  the  farmer  it  is  an  easy 
problem;   in  the  case  of  men  and  women  it  is  not  so  easy. 

It  will  be  seen,  then,  that  modern  wage  systems  are  closely 
interlocked  with  systems  of  management,  and  back  of  this  again, 
often  forgotten,  but  never  absent,  awaits  the  greater  problem 
of  humanity  and  human  existence.  The  time  was  when  wages 
were  settled  without  much  regard  to  this  greater  problem,  but 
unless  all  signs  are  misleading  it  will  soon  be  the  great  factor  in 
both  industrial  management  and  reward.  A  future  chapter 
will  discuss  more  fully  the  limitations  of  some  of  these  new 
methods  (see  Chapter  14). 

i  See  Tran.  A.S.M.E.,  Vol.  24,  page  1295. 


THE  COMPENSATION  OF  LABOR  197 

PROFIT-SHAKING  METHODS. 

112.  The  student  of  industrial  problems  turns  naturally  to 
a  consideration  of  cooperative  methods  as  a  means  of  restoring, 
in  a  measure,  what  the  workman  has  lost  by  separation  from 
the  tools  of  production;  and  many  comprehensive  attempts 
have  been  made  to  realize  some  of  the  benefits  of  cooperation 
in  actual  practice.  A  few  have  met  with  some  measure  of  suc- 
cess, where  the  conditions  were  favorable,  but  the  great  majority 
have  been  failures. 

One  of  the  most  common  forms  of  this  idea  is  the  profit- 
sharing  scheme  whereby  a  certain  percentage  of  the  profits  are 
distributed  at  fixed  intervals,  usually  annually  or  semi-annually, 
in  some  definite  ratio  to  all  employees  that  have  been  in  the 
employ  of  the  firm  for  a  stated  term.  The  difference  between 
this  plan  and  the  wage  systems  discussed  should  be  clearly  noted. 
Under  all  of  these  wage  systems  the  extra  reward  is  individual, 
is  based  on  diligence  and  skill,  and  is  paid  at  once.  Under 
profit-sharing  the  bonus  comes  at  long  intervals  and  as  a  result 
of  many  conditions  that  are  obscure  and  conflicting  to  the  worker. 
Furthermore,  the  conditions  that  fix  the  possibility  of  such  re- 
ward are,  to  a  large  extent,  not  under  the  control  of  the  worker 
and  any  extra  effort  he  may  make  may  be  more  than  offset  by 
foolish  mistakes  in  management  or  unfortunate  trade  conditions. 
The  reward  is  too  remote  to  interest  him  to  the  same  extent  as 
the  pay  systems  discussed.  This  method  of  bonus  award  also 
makes  no  distinction  between  the  diligent  and  lazy,  which  is 
manifestly  unfair,  and  incidentally  one  of  the  basic  troubles 
that  lie  at  the  root  of  all  cooperative  schemes.  Clearly,  such 
unjust  discrimination  must  tend  to  kill  personal  incentive  and 
ambition  and  to  reduce  all  efforts  to  mediocrity.  Any  system 
that  eliminates  personal  ambition  and  individual  incentive  is 
foreordained  to  failure. 

The  same  remarks  apply,  in  a  general  way,  to  schemes  which 
permit  employees  to  invest  in  shares  of  the  company's  stock  on 
advantageous  terms.  As  a  means  of  bettering  the  financial 
status  of  the  employee  and  of  obtaining  his  interest,  they  no 


198    PRINCIPLES  OF  INDUSTRIAL  ORGANIZATION 

doubt  are  valuable;  but  they  should  not  in  any  case  be  looked 
on  as  rewards  for  increased  diligence.  As  Mr.  Going  has  well 
said  —  "  There  is  no  necessary  automatic  and  manifestly  just 
relation  between  an  employee's  efficiency  or  faithfulness  and  his 
ability  to  save  money  and  invest  in  stocks.  The  most  deserving 
man  in  the  company's  service  may  have  a  large  family,  or  a  sick 
wife,  or  dependent  parents,  and  he  may  have  to  turn  aside  from 
the  opportunity  to  become  an  investor  and  see  it  go  to  someone 
whom  he  knows  (as  perhaps  only  one  workman  can  know  an- 
other) is  less  worthy."  What  he  needs  and  desires  is  immediate 
and  proportionate  reward  for  his  labor. 

There  are  other  difficulties  in  the  path  of  profit-sharing 
schemes.  Workmen  are  always  willing  to  share  the  profits  but 
are  neither  willing,  nor  as  a  rule  able,  to  share  the  losses.  Nor 
is  there  any  just  reason  why  they  should  participate  in  the  losses 
since  these  are  matters,  in  a  way,  beyond  their  control.  Any 
division  of  profits  will,  in  general,  be  looked  upon  as  a  gratuity 
and  not  as  a  reward  for  extra  effort  or  diligence.  While,  there- 
fore, profit-sharing  is  most  praiseworthy  and  to  be  commended, 
it  should  not  be  confused  with  the  more  vital  problem  of  the 
immediate  reward  of  labor  according  to  its  deserts. 

REFERENCES  . 

Shop  Management,  by  F.  W.  Taylor,  Trans.  A.S.M.E.,  Vol.  24. 
Work  Wages  and  Profits,  by  H.  L.  Gantt. 
Efficiency,  by  Harrington  Emerson. 


CHAPTER   XII. 

PURCHASING,  STORING  AND   INSPECTION   OF    MATERIALS. 

113.  Sources  of  Supply.  Viewed  broadly,  all  industrial  effort 
is  concerned  with  the  transforming  of  natural  resources  into 
useful  forms  and  the  transportation  of  the  same  to  the  places 
where  they  are  needed.  As  each  increment  of  labor  is  bestowed 
upon  the  material,  as  it  passes  through  the  process,  it  rises  in 
value.  Thus,  coal  is  mined  in  one  place,  iron  ore  in  another. 
Both  are  transported  to  some  convenient  place,  arriving  there 
worth  a  few  cents  per  hundred  pounds.  By  means  of  the  coal 
the  iron  is  here  transformed  into  pig  iron  worth  perhaps  one 
cent  per  pound.  This  pig  iron  may  be  transformed  in  the  same 
plant  into  steel  rails  worth  li  cents  per  pound,  or  it  may  be 
again  transported  to  some  engine  works  and  made  into  steam 
engines  worth  20  cents  per  pound.  Or  it  may  be  shipped  to  a 
crucible  steel  works  and  made  into  crucible  steel  bars  worth  16 
cents  per  pound  and  these  steel  bars  may  be  transformed  else- 
where into  watch-springs  worth  many  dollars  per  pound.  This 
is  true,  in  a  general  sense,  of  all  the  products  of  industry;  ma- 
terial values  being,  in  the  main,  accumulated  labor  values,  the 
value  of  the  original  material  in  its  natural  state  being,  often, 
a  negligible  part  of  the  market  value. 

In  some  cases  the  transformation  of  the  raw  product  into 
useful  form  is  accomplished  in  one  plant.  Thus,  table  salt, 
kerosene  and  similar  commodities  may  each  be  made  in  a  single 
reduction  works  and  placed  directly  upon  the  market.  L^most 
cases,  however,  this  is  not  so,  most  market  products  ^Hi  the 
result  of  several  distinct  stages  of  manufacture,  each  stage  sepa- 
rated widely  by  character  and  geographical  distance.  This  is 
so  from  the  nature  of  the  case  and  from  the  complexity  of  modern 
manufacturing.  The  man  that  smelts  pig  iron  would  not  be 
expected  to  produce,  also,  ail  the  finished  products  into  which  it 

199 


200     PRINCIPLES   OF   INDUSTRIAL   ORGANIZATION 

enters;  in  fact,  he  may  be  compelled  to  supply  a  widely  diver- 
sified field  of  industry  in  order  to  secure  the  quantity  necessary 
to  manufacture  pig  iron  economically.  These  general  conditions 
apply  to  all  those  that  in  turn  transform  pig  iron  into  other  forms, 
and  equally  again  to  those  that  in  turn  use  these  other  forms  for 
other  purposes* 

What,  then,  appears  to  one  manufacturer  as  finished  prod- 
uct appears  to  some  other  manufacturer  as  raw  material,  and  the 
extent  to  which  any  manufacturer  may  depend  upon  other 
branches  of  industry  varies  widely.  In  very  few  instances  is  he 
entirely  independent  of  other  lines  of  industry, 
i  As  pointed  out  in  Article  64  the  materials  that  enter  into  any 
given  finished  product  are,  in  general,  of  two  kinds,  direct  and 
indirect;  and  even  though  a  manufacturer  may  control  the 
direct  material  from  its  natural  sources  to  the  market,  he  must, 
in  most  instances,  depend  on  other  people  for  much  of  his  in- 
direct supplies  and  his  tools  of  production.  If,  however,  the 
required  quantity  of  any  material,  direct  or  indirect,  becomes 
great  enough  it  may  pay  the  manufacturer  to  extend  his  control 
of  that  particular  material  a  little  farther  back  toward  the  nat- 
ural sources.  Thus,  a  growing  concern  may  not  have  enough 
demand  for  castings  to  operate  a  foundry,  but  as  the  business 
increases  it  may  pay  to  build  one,  even  though  no  reduction  in 
price  is  so  obtained,  in  order  to  control  the  supply  of  castings 
and  thus  facilitate  deliveries.  If  the  quantity  increases  so  that 
foundry  work  can  be  prosecuted  as  economically  as  in  the  found- 
ries from  which  castings  were  formerly  purchased,  the  profit 
formerly  paid  these  foundries  is  thereby  saved  (see  Art.  22). 
The  electrical  manufacturing  companies  in  this  country  de- 
pended originally  on  other  sources  for  their  porcelain  and  mica 
products  and  small  companies  still  do  so.  As  the  quantities 
incident  to  great  growth  have  appeared,  some  of  the  larger 
electrical  works  have  put  up  their  own  porcelain  works  and  have 
installed  presses  for  making  mica  products.  Some  have  even 
put  in  wire-drawing  plants,  not  so  much  with  a  view,  perhaps, 
of  obtaining  lower  priced  wire,  as  for  convenience  and  better 
control  of  deliveries.  The  importance,  therefore,  of  the  control 


PURCHASING,   ETC.,   OF  MATERIALS  201 

of  the  several  streams  of  material  coming  into  an  industrial  plant 
will  depend  on  their  relative  bearing  on  questions  of  economy 
of  manufacture  or  convenience  as  affecting  delivery  of  finished 
goods.  It  may  be  highly  important  to  control  a  large  stream 
for  financial  reasons.  It  may  be  no  less  important  to  control  a 
very  small  one  because  of  its  effect  on  deliveries.  The  lack  of  a 
small  detail  will  hold  up  the  delivery  of  a  machine  as  effectually 
as  will  a  larger  one;  and  thus  control  of  the  sources  of  supply 
may  vary  from  the  simple  case  where  all  materials  are  fully  con- 
trolled, to  the  other  extreme  where  nothing  but  assembling  is 
carried  on,  the  finished  parts  coming  from  many  factories  ready 
to  be  assembled.  The  first  extreme  is  rare  but  many  cases  of 
the  latter  are  to  be  found. 

114.  Purchasing.  The  relative  value  of  the  labor  and  material 
that  enters  into  any  product  will,  of  course,  vary  greatly  with 
the  industry  considered.  In  some  cases  the  material  cost  may 
be  negligible,  as  compared  with  labor,  and  again  it  may  be  much 
more  important  than  labor;  but  in  all  industries  the  purchasing 
of  materials  and  supplies  should  be  very  carefully  considered 
and  properly  provided  for.  Responsibility  for  all  purchases 
should  be  centralized,  and  purchasing  by  several  persons  should 
never  be  tolerated  as  it  always  leads  to  loose,  extravagant  ideas 
and  methods,  higher  purchase  prices  and  needless  waste.  The 
opportunity  for  dishonesty  is  also  much  increased.  A  good 
purchasing  agent  is  always  a  valuable  man  and  as  the  size  and 
complexity  of  a  business  increases,  his  value  rises.1  It  is  axiomatic 
that  he  must  possess  the  business  training  and  natural  com- 
mercial instinct  that  will  make  him  a  keen  student  of  market 
conditions  and  a  judge  of  values.  It  is  equally  important  that 
he  be  able  to  systematize  his  department  so  that  it  runs  smoothly 
in  connection  with  the  other  departments  serving  them  quickly 
and  well.  If,  in  addition,  he  is  well  informed  on  the  technical 
and  practical  side  of  the  industry  his  efficiency  will  be  increased 
many  fold.  For  these  reasons  a  man  promoted  from  the  shop 
or  engineering  department,  all  other  things  being  equal,  will 

1  The  purchasing  department  of  a  large  manufacturing  plant  will  be  very 
large  and  carefully  divided  into  sub-departments.  (See  Art.  43.) 


202     PRINCIPLES   OF   INDUSTRIAL   ORGANIZATION 

make  a  better  purchasing  agent  than  one  promoted  from  the 
clerical  force  of  the  office.  Purchasing,  however,  involves  a 
knowledge  of  business  methods  and  forms,  of  which  shop  men 
and  engineers  are,  unfortunately,  seldom  well  informed;  hence, 
purchasing  agents  are  usually  recruited  from  the  clerical  force. 

The  demand  for  materials  grows  naturally  out  of  the  needs 
of  the  business  and  cannot,  therefore,  originate  with  the  pur- 
chasing agent.  In  a  shop  devoted  to  general  repairs,  the  requi- 
sitions for  materials  would,  most  naturally,  originate  with  the 
foremen  in  charge  of  work  since  they  will  know  better  than 
anyone  what  is  wanted.  In  a  shop  building  new  work  to  order 
only,  such  as  an  engine  works,  these  material  requisitions  for 
direct  material  would  originate  in  the  engineering  department, 
though  they  might  pass  through  the  storekeeper's  hands  before 
going  to  the  purchasing  agent  in  order  to  check  off  material  on 
hand.  In  a  shop  manufacturing  standardized  articles,  as  knives, 
watches,  etc.,  the  material  requisition  would  naturally  originate 
in  the  stores  department,  which  is  the  reservoir  that  feeds  the 
factory  and  here  also  would  originate,  always,  the  requisitions 
for  all  indirect  and  expense  material.  In  a  shop  doing  all  three 
of  these  classes  of  production,  therefore,  material  requisitions 
might  originate  from  several  sources;  and  just  as  it  is  necessary 
to  centralize  the  authority  and  responsibility  of  the  purchases 
based  on  these  material  requisitions,  so  it  is  absolutely  necessary 
to  fix  definitely  the  authority  and  responsibility  of  originating 
these  requisitions.  In  a  factory  that  is  well  managed  this  power 
is  limited  to  responsible  men,  and  the  requisitions  in  many  cases 
must  be  countersigned  by  some  higher  official  as  a  check  on  irregu- 
larities. The  making  of  requisitions,  the  purchasing  of  materials 
and  the  clerical  machinery  involved  is  simplified  and  expedited 
by  the  use  of  printed  forms1  and  blanks,  a  discussion  of  which 
is  beyond  the  limits  of  this  treatise. 

Skillful  purchasing  involves  five  principal  features,  namely: 

(a)  Price. 

(6)  Quality. 

(c)  Quantity. 

1  See  Factory  Organization,  by  Hugo  Diemer. 


PURCHASING,  ETC.,  OF  MATERIALS          203 

(d)  Time  of  delivery. 

(e)  Verification  of  goods  purchased. 

(a)  For  a  given  quality  and  quantity  of  material  the  securing 
of  low  prices  becomes  a  commercial  matter  depending  on  a  knowl- 
edge of  the  sources  of  supply,  transportation  facilities,  market 
conditions,  discounts  and  similar  considerations  that  apply  to 
all  purchasing.  Price,  however,  is  not  always  the  only  factor 
that  must  be  considered,  for  as  will  be  seen,  an  effort  to  obtain 
low  purchase  prices  may  result  in  high  manufacturing  costs, 
though  it  is  fundamental  that,  other  things  being  equal,  the 
lowest  possible  prices  should  be  obtained. 

(6)  It  is  obvious  that  the  judgment  of  the  purchasing  agent 
as  regards  the  quality  of  materials  required  increases  with  his 
knowledge  of  the  trades  and  processes  for  which  he  buys.  In 
the  buying  of  many  indirect  or  expense  materials  such  as  oil, 
waste,  stationery,  etc.,  it  is  customary  in  many  plants  to  trust 
to  the  judgment  of  the  purchasing  agent.  In  fact,  this  is  true 
in  many  cases  of  much  of  the  direct  material.  But  as  an  in- 
dustry grows  more  complex  and  the  scientific  knowledge  on 
which  it  is  based  becomes  more  important,  the  purchasing  agent 
must  depend  more  on  the  expert  in  each  line  for  instructions  as 
to  the  quality  of  material  required.  In  electrical  construction 
the  quality  of  many  materials  is  of  highest  importance  and  the 
characteristics  must  be  carefully  specified  to  the  purchasing 
agent.  Many  large  companies  keep  well-equipped  experimental 
laboratories  for  determining  the  best  qualities  of  material;  foun- 
dries now  buy  their  iron  by  chemical  specification;  and  careful 
managers  specify  the  character  of  their  supplies,  such  as  coal 
and  oil.  Best  results  will,  therefore,  be  obtained  when  the 
special  buying  ability  of  the  purchasing  agent  is  reinforced  by 
the  expert  knowledge  of  the  specialist  who  knows  the  charac- 
teristics desirable  in  the  material  under  consideration. 

(c)  The  temptation  to  buy  large  quantities  of  material  is 
always  strong  for  two  reasons.  First,  lower  prices  are  obtained 
as  the  quantity  to  be  purchased  increases,  and  second,  a  large 
stock  on  hand  insures  prompt  service  to  the  shop  and  consequent 
quick  deliveries.  But  here  again  the  judgment  of  the  purchas- 


204     PRINCIPLES   OF   INDUSTRIAL   ORGANIZATION 

ing  agent  should  be  reinforced  by  expert  knowledge  and  advice. 
Clearly,  there  is  no  money  in  ordering  several  years'  supply  of 
any  one  article,  storing  it,  and  thus  tying  up  considerable  cap- 
ital and  losing  the  interest  thereon  simply  for  a  small  saving  in 
price.  The  quantity  ordered,  therefore,  should  have  a  reasonable 
relation  to  the  prospective  output  of  the  factory.  Furthermore, 
before  placing  orders  for  large  quantities  of  stock,  particularly 
special  stock,  careful  inquiry  should  be  made  as  to  prospective 
changes  in  design  that  may  render  such  stock  obsolete;  an 
occurrence  only  too  frequent  in  an  industry  that  is  in  a  state 
of  development.  In  large  works  a  great  purchasing  advan- 
tage can  be  obtained  by  standardizing,  as  far  as  possible,  articles 
of  a  similar  character  used  by  different  departments,  thus  de- 
creasing the  variety  and  increasing  the  number  of  each  kind 
purchased.  This  principle  should  be  observed  from  office  lead 
pencils  to  the  largest  common  supplies  and  tools  purchased. 

(d)  The  time  element  is  a  most  important  one  in  purchasing. 
It  is  essential  that  all  material  for  a  job  arrives  so  as  to  be  fab- 
ricated in  time  to   avoid  delay  in  assembling  the   completed 
product.     Yet  a  contract  might  be  taken  for  machines  involving 
the  use  of  tons  of  copper,  say,  and  requiring  a  year  for  completion, 
the  copper  not  being  needed  till  near  the  end  of  the  construction. 
Evidently  the  purchasing  agent  working  in  connection  with  a 
good  planning   department   can   save   considerable   money  by 
means  of  well-arranged  schedules  of  delivery.     The  same  thing 
can  be  accomplished  for  material  used  constantly,  such  as  coal, 
by  making  long-term  contracts  but  with  periodic  deliveries  and 
payments.     In  other  cases,  again,  the  purchasing  agent  is  often 
justified  in  paying  a  high  price  for  a  quick  delivery  if  it  will  save 
great  delay  in  the  factory  or  secure  a  remunerative  contract 
because  of  early  shipment. 

(e)  The  verification  of  purchased  goods  is  usually  conducted 
by  the  receiving  department  which  is,  in  general,  a  branch  of 
the  stores  department  and  is  therefore  discussed  among  the  prob- 
lems of  that  department.     (See  Article  118.) 


PURCHASING,   ETC.,   OF   MATERIALS  205 

STORES  AND  STOCK. 

115.  Functions  of  Stores  and  Stock.  Under  ideal  manufac- 
turing conditions  the  raw  materials  would  be  used  as  fast  as 
they  arrived  at  the  factory,  passing  directly  through  it;  and 
the  finished  product  would  be  shipped  to  customers  as  fast  as 
it  was  turned  out.  Such  conditions  are  almost  impossible  to 
attain,  though  it  may  be  approached  in  some  of  the  simple  con- 
tinuous industries.  In  most  manufacturing  industries  the  raw 
materials  are  used  in  varying  amounts  at  varying  times,  and 
sales  are  likewise  intermittent  and  varied.  For  these  reasons, 
and  also  because  purchasing  and  transportation  are  facilitated 
by  quantity,  provision  must  be  made  for  storing  such  quantities 
of  raw  material  as  will  insure  prompt  service  for  these  varying 
demands.  Where  sales  are  varying  and  product  must  be  made 
in  advance  of  sales  similar  provision  must  be  made  for  caring  for 
finished  product,  in  order  to  insure  prompt  delivery  to  custom- 
ers. In  shops  that  make  product  to  order  only,  as  a  shipbuilding 
company,  this  last  feature  would  not  be  important. 

Unworked  material  is  usually  known  as  stores  and  the  space 
where  it  is  housed  is  known  as  the  store-room.  The  store-room 
is  in  effect  a  reservoir  between  the  incoming  materials  and  sup- 
plies and  the  factory  proper,  equalizing  the  varying  supply  and 
demand.  Finished  product  ready  for  shipment  is  usually  called 
stock  and  the  place  where  it  is  stored  is  called  a  stock-room. 
The  stock-room  is  in  effect  a  reservoir  between  the  factory  and 
the  selling  department  equalizing  the  varying  demand  of  the 
customer  and  the  varying  output  of  the  shop.  In  small  fac- 
tories the  store-room  and  stock-room  may  be  one,  and  under 
the  control  of  the  same  official  but  there  is  a  distinct  difference 
in  their  functions,  and  as  plants  grow  in  size  separation  becomes 
almost  inevitable. 

In  order  to  obtain  the  advantages  of  manufacturing  a  large 
number  of  pieces  of  one  kind  it  is  often  necessary  to  finish  large 
numbers  of  parts  of  machines  or  other  products  and  store  them, 
drawing  them  out  for  final  assembly  in  completed  products  as 
the  business  of  the  factory  requires.  In  fact,  in  some  factories 


206    PRINCIPLES   OF   INDUSTRIAL   ORGANIZATION 

carrying  on  semi-continuous  manufacturing,  the  quantities  are 
so  large  that  it  is  necessary  to  store  them  between  successive 
operations,  especially  if  the  materials  involved  are  valuable.  In 
many  cases,  also,  the  same  part  is  used  in  several  different  kinds 
or  sizes  of  product  that  come  through  the  factory  at  different 
times  and  repairs  and  supply  parts  always  demand  a  stock  of 
standard  finished  parts  on  hand.  The  store-room  may,  there- 
fore, also  act  as  a  reservoir  to  equalize  inequalities  in  the  manu- 
facturing processes  of  the  factory  by  storing  so-called  finished 
parts  and  in  some  cases  a  special  section  of  the  store-room  called 
the  finished-parts  store-room  is  set  aside  especially  for  this  pur- 
pose. A  distinction  is  sometimes  made  between  finished  parts 
made  by  the  factory  and  those  purchased.  Thus  bolts,  screws 
or  any  other  element  that  is  purchased  and  used  directly  in  the 
product  are,  strictly  speaking,  finished  parts  and  are  sometimes 
called  purchased  finished  parts  to  distinguish  them  from  manu- 
factured finished  parts.  The  distinction  is,  however,  somewhat 
academic  and  not  of  practical  importance  provided  the  cost  of 
each  article  is  accurately  determined.  The  store-room  may  be 
said,  therefore,  to  care  for  three  classes  of  material: 

(a)  Stores,  or  raw  material  that  is  to  be  fabricated  into  prod- 
uct, consisting  largely,  therefore,  of  direct  material. 

(6)  Supplies,  or  indirect  material,  such  as  oil,  waste,  etc. 

(c)  Finished  parts,  or  product,  fabricated,  but  not  fully  as- 
sembled. 

The  stock-room  in  its  fully  developed  form  will  care  only  for 
finished  product,  that  is,  fully  fabricated  and  ready  to  be  shipped. 
In  large  organizations  this  department  comes,  naturally,  under 
the  shipping  clerk.  In  such  cases  the  stock-room  may  carry 
many  finished  parts  for  convenience  in  supplying  repair  parts. 
In  smaller  concerns  the  stock-room,  store-room,  shipping  and 
receiving  rooms  may  be  under  one  man  and  in  one  room.  But 
as  factories  grow  in  size  these  different  functions  should  be  sepa- 
rated in  the  interests  of  efficiency. 

116.  Store-room  Methods.  The  necessity  and  the  advantages 
of  a  well-organized  store-room  are  not  always  fully  recognized. 
Managers  who  would  look  with  horror  upon  a  financial  system 


PURCHASING,   ETC.,   OF  MATERIALS          207 

that  would  permit  the  easy  extraction  of  small  sums  of  money 
from  the  office  safe,  often  look  complacently  upon  store-room 
methods  that  permit  the  unauthorized  withdrawal  of  valuable 
material  from  the  stores,  wastes  due  to  excess  material  drawn, 
and  losses  due  to  valuable  material  unaccounted  for,  out  of 
all  proportion  to  their  care  of  the  cash  in  the  office  till.  Man- 
agers who  would  look  most  carefully  into  the  tying  up  of 
money  in  securities  permit  the  investment  of  large  sums  in  raw 
material  with  little  thought  as  to  the  relative  amount  invested, 
the  possibility  of  how  long  it  may  remain  so  tied  up,  or  the  de- 
preciation it  may  suffer  while  so  invested.  Yet  material  repre- 
sents value  as  truly  as  the  money  in  the  office  safe,  though  this 
is  not  always  appreciated.  Any  saving  in  material  is  as  effective 
as  a  saving  on  the  pay  roll.  Money  tied  up  in  material  is  crys- 
tallized capital  and  while  in  this  form  is  inactive.  Clearly,  the 
amount  so  invested  should  be  carefully  scrutinized  and  its  total 
kept  as  low  as  proper  service  of  the  factory  will  allow. 

The  principal  business  of  the  store-room  is  to  anticipate  the 
needs  of  the  factory  in  the  most  effective  and  economical  manner 
possible.  In  order  to  accomplish  this  it  must  fulfill  the  follow- 
ing functions  perfectly: 

(a)  Issue .  requisitions  on  the  purchasing  department  for  the 
most  economical  amount  of  the  right  kind  of  material  for  delivery 
at  the  most  advantageous  time. 

(b)  Check  all  material  received  as  to  quality  and  quantity. 

(c)  Store  all  material  in  a  safe  and  convenient  manner. 

(d)  Issue  materials  and  supplies  in  the  exact  amounts  needed 
and  at  the  exact  time  required. 

(e)  Maintain  exact  records  of  all  receipts  and  issues  and  of 
all  balances  on  hand. 

The  work  of  the  stores  department  is,  therefore,  closely  con- 
nected with  that  of  the  purchasing  department  on  the  one  hand 
and  with  the  shop  and  cost  system  on  the  other.  In  small  con- 
cerns the  store-room  and  purchasing  department  are  included 
in  one  department. 

Item  (a).  As  noted  in  Article  114  the  origin  of  requisitions  will 
vary  with  the  character  of  the  industry  but,  most  usually,  all 


208    PRINCIPLES   OF   INDUSTRIAL   ORGANIZATION 

requisitions  originating  outside  the  store-room  should  be  passed 
upon  by  the  storekeeper  so  as  to  insure  the  use  of  material  on 
hand  before  ordering  more.  For  this  reason  all  requisitions  are 
drawn  on  the  store-room  in  some  organizations,  the  store-room 
alone  requisitioning  the  purchasing  department. 

The  problem  presented  in  obtaining  material  for  repair  work 
or  for  special  work  done  on  order  is  comparatively  simple,  since 
the  quantity  and  quality  are  here  fairly  definite  in  character, 
the  question  of  time,  however,  being  often  of  great  importance. 
If  the  work  is  of  great  magnitude  and  is  to  extend  over  a 
considerable  period  of  time  a  careful  planning,  either  by  the 
engineering  department  or  the  planning  department,  of  the  time 
schedule  on  which  materials  should  be  delivered,  is  almost  es- 
sential to  prevent  premature  and  over-investment  of  funds.  In 
the  case  of  repairs,  on  the  other  hand,  quickness  of  delivery  is 
usually  an  essential. 

The  problem  of  anticipating  the  needs  of  a  large  factory  that 
is  manufacturing  standardized  products  of  several  kinds  and 
many  sizes  is  a  much  more  difficult  problem,  including  as  it  does 
the  consideration  of  the  quantity  of  raw  material  that  should 
be  carried  in  all  stages  of  fabrication  from  raw  material  to  fin- 
ished product.  An  adequate  discussion  of  this  problem,  which  is 
one  of  the  most  important  in  all  manufacturing,  is  beyond  the 
scope  of  this  book;  but  a  brief  outline  may  be  of  interest  and 
assistance.  Among  the  leading  considerations  that  must  be 
given  weight  in  deciding  what  stock  of  goods  shall  be  carried  in 
the  several  stages  of  production  the  following  may  be  noted: 

(1)  The  demand  for  the  particular  part  or  combinations 

of  parts. 

(2)  The  saving  that  may  be  effected  by  manufacturing  in 

quantity. 

(3)  The  interest  on  the  capital  tied  up  in  material  in  process 

of  manufacture,  and  in  facilities  for  storing  and  caring 
for  it. 

(4)  The  time  required  to  obtain  raw  material  and  to  as- 

semble it  into  completed  product  from  various  stages 
of  fabrication. 


PURCHASING,   ETC.,   OF  MATERIALS          209 

(5)  The  probability  of  change  of  design  and  consequent  de- 
preciation of  raw  material,  finished  parts  or  completed 
product. 

To  make  the  interrelation  of  these  considerations  clearer  con- 
sider a  hypothetical  problem  of  manufacturing  a  complete  line 
of  alternating-current  transformers.  The  demand  for  the  smaller 
sizes  of  transformers  or,  say,  up  to  100  kilowatts,  is  large  though 
varying,  very  quick  deliveries  are  essential,  the  voltages  are 
moderate  and  the  design  will  be  assumed  to  be  fairly  stable. 
These  small  sizes  would  be  in  continuous  manufacture,  or  they 
would,  at  least,  be  passed  through  the  factory  in  large  lots,  finished 
completely  and  put  in  stock.  To  facilitate  delivery  some  stock 
of  these  sizes  would  also  be  carried  in  branch  sales  office.  Com- 
plete sets  of  special  winding  machines  and  other  labor-saving 
devices  would  be  developed  so  as  to  take  advantage  of  quantity 
in  reducing  shop  costs.  The  anticipating  of  the  demand  for 
raw  material  for  this  case  is  comparatively  simple,  care  being 
necessary  only  to  see  that  the  supply  of  any  material  does  not 
get  so  low  before  ordering  that  production  is  held  up;  and  care 
exercised  on  the  other  hand  that  the  amount  ordered  is  not  so 
excessive  as  to  tie  up  too  much  capital  or  to  run  the  risk  of  any 
of  it  becoming  obsolete  through  changes  in  design.  This  case 
represents  in  a  general  way  the  problem  of  continuous  processes 
of  all  kinds. 

Now,  in  general,  the  demand  for  a  given  class  of  product 
lessens  as  the  size  of  the  unit  increases.  Transformers  from  100- 
kilowatt  to  say  250-kilowatt  capacity  would  probably  not  be 
in  such  demand  as  the  smaller  sizes  and  would  not  be  carried 
in  branch  office  stocks. 

The  demand  may  also  vary  with  the  season.1     Nevertheless, 

1  Seasonable  products  are  often  difficult  problems.  They  must,  as  a 
rule,  be  made  during  the  season  when  they  are  riot  wanted  so  as  to  anticipate 
the  market,  and  production  comes  to  a  standstill  during  the  season  of  demand. 
Manufacturers  usually  try  to  equalize  these  demands  by  making  articles 
that  are  complementary;  as,  for  instance,  fan  motors  may  be  manufactured 
during  the  winter  for  the  summer  trade  and  arc  lamps  during  the  summer  for 
the  winter  trade.  Other  lines  of  industry  do  not  permit  this  principle  because 
of  limitations  in  the  equipment. 


210     PRINCIPLES   OF   INDUSTRIAL   ORGANIZATION 

the  yearly  demand  is  such  that  they  can  be  economically  put 
through  the  shop  in  large  lots,  the  size  of  these  lots  and  the 
proper  times  for  authorizing  their  production  requiring  careful 
consideration  to  keep  the  investment  as  low  as  is  consistent  with 
prompt  delivery.  A  good  equipment  of  special  tools  might  also 
be  warranted  for  these  sizes  though  they  may  not  be  in  con- 
tinual use. 

Transformers  of  say  500-kilowatt  capacity  may  present  a  very 
different  problem.  Here  the  demand  may  be  so  small  that  it 
may  not  be  advisable  to  put  large  lots  through  to  completion 
and  stock,  because  the  interest  on  the  money  so  tied  up  would 
more  than  equal  the  saving  made  by  production  in  quantity. 
Yet  the  time  required  to  manufacture  these  larger  sizes  may  be 
prohibitive  from  the  standpoint  of  the  salesman  and  therefore 
it  may  be  good  policy  to  make  up  and  stock  some  of  the  parts 
that  require  the  longest  time  to  produce.  Thus  the  copper 
coils  may  be  wound  and  insulated  and  carried  as  finished  parts, 
thus  also  providing  spare  parts  for  repairs.  A  limited  amount 
of  sheet  steel  for  building  up  the  laminated  cores  might  also  be 
carried  among  the  finished  parts.  The  cast-iron  casings  or  any 
steel  or  malleable-iron  castings  that  require  time  to  obtain  might 
be  carried  in  the  raw  material  supplies,  labor  being  expended 
only  on  such  parts  as  would  greatly  facilitate  delivery  when 
orders  to  assemble  these  sizes  were  received.  The  outfit  of 
special  tools  for  these  sizes  would  also  be  very  limited  and  care- 
fully considered. 

In  the  case  of  still  larger  sizes  not  even  finished  parts  of  any 
kind  would  be  justifiable  and  only  such  raw  materials  as  require 
a  considerable  time  to  obtain  would  be  carried.  Thus,  certain 
special  sizes  of  copper  strip  might  be  justified  though  most  usu- 
ally special  material  of  any  kind  should  be  avoided,  if  possible, 
since,  if  rendered  obsolete  for  any  reason,  it  depreciates  very 
rapidly,  and  is,  in  general,  useless  for  other  purposes.  No 
special  tools  might  be  justified  for  these  larger  sizes  because  of 
the  small  quantity  demanded. 

In  still  larger  sizes  and  perhaps  for  higher  voltages  it  may 
be  that  not  even  raw  materials  should  be  carried.  The  more 


PURCHASING,   ETC.,   OF  MATERIALS          211 

difficult  engineering  problems  involved,  the  possibility  of  changes 
in  design,  the  varying  requirements  to  be  met  in  the  field,  would; 
perhaps,  make  all  anticipation  of  materials  hazardous  and  out 
of  the  question.  The  problem  has  passed  from  the  extreme  case 
of  the  continuous  industry  to  the  other  extreme  where  the  prod- 
uct must  be  made  to  order  and  material  ordered  as  needed  and 
not  anticipated. 

The  relative  sizes  assumed  above  are  of  course  hypothetical 
but  entirely  possible.  The  principles  involved  are,  however, 
universal.  The  question  of  the  quantity  and  form  in  which 
material  shall  be  carried  is  not  a  simple  one,  nor  one  that  can, 
in  the  general  case,  be  decided  by  any  one  man.  The  store- 
keeper can  easily  handle  the  extreme  cases.  In  the  cases  that 
approach  continuous  production  it  is  simply  a  matter  of  con- 
sidering the  stock  bins  as  hoppers  feeding  the  factory.  Mini- 
mum limits  can  be  set  to  each  bin,  or  other  storage,  that  will 
serve  as  a  warning  to  order  more  material.  Maximum  limits 
may  be  set  based  on  the  sales  demands  that  will  prevent  over- 
investment. In  the  other  extreme  where  work  is  done  to  order, 
the  problem  is  specific  as  to  quality  and  quantity  and  the  im- 
portant element  is  the  time  relation.  But  between  these  ex- 
tremes the  combinations  are  complex  and  an  intelligent  solution 
can  be  reached  only  by  the  joint  efforts  of  the  storekeeper,  the 
salesman,  the  engineer,  the  financier  and  the  toolmaker.  (See 
also  Article  49.) 

Item  (b).  The  inspection  of  material  as  it  is  received  is  dis- 
cussed along  with  the  general  problem  of  inspection  in  Article  118. 

Item  (c).  It  is  axiomatic  that  all  materials  should  be  stored 
in  places  where  they  will  be  safe  against  deterioration  or  pilfer- 
ing. They  should  also  be  stored  in  a  convenient  and  systematic1 
manner  and  so  that  they  can  be  delivered  quickly  to  the  shop. 
In  large  works  branch  store-rooms  are  a  necessity,  both  for  rea- 
sons of  convenience  and  economy.  If  the  stores  are  extensive  a 
book,  plan  or  written  record  of  some  kind  showing  the  location 
of  stores  is  imperative  to  guard  against  the  delay  and  confusion 

1  For  a  helpful  article  on  stores  arrangement,  see  Engineering  Magazine, 
Nov.,  1904. 


212     PRINCIPLES   OF   INDUSTRIAL   ORGANIZATION 

arising  from  the  loss  of  experienced  employees  who  carry  such 
matters  in  their  heads.  The  same  remarks  apply  to  pattern  and 
other  storage  problems.  A  carefully  planned  systematic  way 
of  storing  tools,  patterns  and  materials  of  all  kinds  is  an  im- 
portant feature  of  good  management. 

Item  (d).  In  former  times,  when  shops  and  factories  were 
small,  materials  and  supplies  were  stored  on  open  shelves  and  each 
workman  helped  himself  to  what  was  wanted.  The  custom  still 
prevails  in  small  plants,  particularly  where  the  stores  are  such 
as  are  of  no  personal  value  to  the  workmen,  or  where  they  con- 
sist of  indirect  material  and  form  a  very  small  part  of,  the  ma- 
terial cost.  There  are,  no  doubt,  many  cases  where  it  would 
cost  more  to  employ  a  storekeeper  than  he  could  save  by  his 
watchfulness;  but  in  most  cases  it  pays  to  put  all  stores  under  a 
good  storekeeper,  give  him  proper  facilities  to  keep  the  stores 
properly,  and  then  hold  him  responsible  for  wastes  and  losses, 
so  far  as  the  stores  are  concerned. 

It  is  common  experience  that  workmen  cannot,  in  general,  be 
trusted  to  draw  either  direct  or  indirect  material  from  stores 
without  great  waste,  both  as  to  the  quantity  drawn  and  its 
economical  use.  Furthermore,  loose  methods  of  issuing  mate- 
rials are  always  likely  to  lead  to  dishonesty  and  pilfering.  The 
first  method  of  checking  these  difficulties  was  to  put  the  respon- 
sibility on  the  foreman.  Under  this  system  each  foreman  is 
furnished  with  an  order  book  and  no  article  can  be  issued  from 
the  store-room  except  on  the  authority  of  the  foreman's  order 
which  describes  the  material  required,  the  amount  needed,  and 
the  order  number  to  which  it  is  to  be  charged.  Indirect  material 
is  ordered  in  the  same  way;  in  many  cases  the  foreman  also 
notes  the  order  number  to  which  the  expense  material  is  to  be 
charged,  this  number  usually  being  the  order  number  on  which 
the  workman  is,  at  that  time,  employed.  The  unfairness  of 
such  a  method  of  distributing  expense  material  is  obvious.  The 
orders  issued  by  the  foremen  are  taken  up  by  the  storekeeper 
and  are  his  authority  for  the  issuance  of  the  material  and  also 
the  basis  of  material  costs. 

The  advantages  of  such  a  system  are  its  simplicity,  flexibility 


PURCHASING,   ETC.,   OF  MATERIALS  213 

and  quickness.  No  delays  are  experienced  in  getting  the  ma- 
terial from  the  stores  to  the  factory  floor.  It  responds  instantly 
to  emergencies,  either  in  production  or  in  the  shop  repairs. 
There  are  many  places  where  it  is  adequate,  particularly  where 
the  force  of  men  is  small,  the  foreman  intelligent  and  the  stores 
of  no  value  to  the  workman  personally,  and  where  the  number 
of  orders  issued  daily  is  small  and  the  accounting  consequently 
easy. 

On  the  other  hand  as  departments  become  larger  it  is  not  good 
economy  to  use  a  busy  foreman  for  this  purpose.  His  time  is 
more  valuable  for  other  purposes,  and  he  will  not  do  it  well  if 
he  pays  the  attention  he  should  to  the  more  important  problems 
of  production.  He  may,  of  course,  be  given  clerical  help;  but 
this,  again,  is  a  palliative  only,  as  the  system  falls  down  for  other 
reasons.  It  has  been  pointed  out  in  Article  63  that  as  shops 
grow  in  size  the  problem  of  cost-keeping  becomes  more  and  more 
important  and,  in  most  instances,  when  the  problem  of  drawing 
material  becomes  too  great  for  the  foreman,  it  is  high  time  to 
consider  better  methods  of  cost-keeping. 

This  leads  naturally  to  the  preplanning  of  work  and  the  use 
of  the  production  order  (Fig.  6).  Under  these  modern  methods 
full  bills  of  material  are  prepared  either  in  the  engineering  de- 
partment, the  planning  department,  if  there  is  one,  or  by  some- 
one in  the  office  of  the  superintendent.  These  bills  of  material 
give  full  information  1  regarding  the  quality  and  quantity  of  the 
material  and  the  order  number  to  which  it  is  to  be  charged. 
They  are  made  in  multiple,  one  copy  going  to  the  foreman  with 
the  drawings  and  other  directions  for  the  work  and  constituting 
his  authority  to  draw  the  material.  One  goes  to  the  storekeeper 
and  constitutes  his  authority  for  issuing  the  material  specified 
and  serving  also  as  the  basis  of  costs.  (See  Article  71  and 
Fig.  6.) 

The  accuracy  of  the  method  is  manifest.  If  properly  operated 
it  prevents  unnecessary  drawing  of  direct  material,  fixes  respon- 

1  It  is  of  course  difficult  to  specify  with  great  exactness  all  material  required 
for  some  classes  of  work.  However,  the  corrections  necessary  need  not  be 
great  except  in  very  complex  work. 


214    PRINCIPLES   OF   INDUSTRIAL   ORGANIZATION 

sibility  and  authority  definitely,  and  in  such  a  manner  that 
errors  or  irregularities  can  be  instantly  located  on  those  respon- 
sible. Most  important  of  all  it  permits  of  more  accurate  costs 
than  are  attainable  under  the  older  methods. 

The  method  is  not  flexible,  however,  and  emergencies  must 
be  cared  for  by  modifications  of  the  plan.  Small  jobs  would 
cost  too  much  if  passed  through  a  system  of  this  kind.  It  does 
not  take  account  of  expense  material  and  supplies.  For  these 
reasons  it  is  customary  to  give  some  foreman,  or  other  official, 
power  to  issue  emergency  requisitions  to  care  for  these  special 
conditions.  Thus,  in  an  emergency  repair  job  brought  into  the 
shop  on  Saturday  afternoon,  or  an  imperative  repair  job  on  the 
shop  power  house  on  Sunday,  when  the  machinery  of  the  plan- 
ning department  is  not  running,  this  official  would  issue  the 
requisitions,  subject  to  the  approval  of  the  proper  authorities 
when  the  office  and  store-room  open  up  again.  Emergency 
methods  must  always  be  provided,  in  any  well-organized  sys- 
tem, to  prevent  inflexibility  destroying  its  usefulness.  It  is  the 
fear  of  this  inflexibility  that  often  leads  superintendents  and 
foremen,  charged  with  the  duties  of  production  to  oppose  new 
systems  that  savor  of  "  red  tape  "  because,  while  they  may  cure 
certain  evils,  they  may  do  so  at  the  cost  of  convenience  and  flexi- 
bility. This  particular  defect  in  all  systems  deserves  careful 
consideration  in  installing  them  and  it  is  in  making  modifica- 
tions of  this  kind  that  the  manager  shows  his  true  ability  in 
organizing. 

Expense  materials  and  supplies,  such  as  oil  and  waste  cannot, 
of  course,  be  handled  on  production  orders.  They  may  be  is- 
sued on  the  foreman's  order,  but  in  no  case  should  the  foreman 
assign  the  order  number  to  which  they  are  to  be  charged  unless 
classified  standing  order  numbers  have  been  provided  for  this 
purpose.  (See  Article  72.)  Standard  supplies,  such  as  oil  and 
waste,  are  often  given  out  at  assigned  times  only,  and  in  definite 
quantity,  to  each  man.  Extra  quantities  may  be  drawn  at 
other  times  by  special  order  only. 

Item  (e) .  It  is  obvious  that  if  the  stores  department  is  to  an- 
ticipate the  needs  of  the  factory  it  must  keep  a  fairly  accurate 


PURCHASING,    ETC.,   OF  MATERIALS          215 

record  of  all  material  and  supplies.  If  a  planning  department 
exists  this  need  is  accentuated,  since  skillful  planning  cannot  be 
carried  on  without  accurate  record  of  materials  on  hand.  The 
extent  and  detail  necessary  in  such  records  will,  of  course,  vary 
greatly  with  the  business.  In  the  case  of  continuous  proc- 
esses, or  of  manufacturing  approaching  a  continuous  process, 
where  the  material  for  the  most  part  moves  from  the  store-room 
directly  through  the  factory  without  interruption,  the  store- 
room bins  and  racks  may  be  considered  as  reservoirs  in  which 
the  material  should  never  fall  below  or  rise  above  certain  eco- 
nomical limits  that  have  been  fixed  by  the  considerations  al- 
ready discussed. 

Several  methods  are  available  for  making  intelligent  use  of 
such  maximum  and  minimum  limits.  The  simplest  is  that 
which  may  be  called  observation  of  limits.  Usually  only  two 
limits  are  set,  the  maximum  and  the  minimum,  though  some- 
times a  lower  or  "  danger  "  limit  is  set  for  the  purpose  of  indi- 
cating that  orders  for  a  fresh  supply  of  material  must  be  rushed. 
To  keep  account  of  the  material  a  printed  form  is  attached  to 
each  bin  or  rack  and  as  material  is  withdrawn  the  storekeeper 
deducts  the  amount  taken  away,  thus  keeping  a  continuous  rec- 
ord of  what  is  left.  When  the  amount  falls  to  the  lower  limit 
an  order  is  placed  that  will  bring  the  amount  up  again  to  the 
maximum.  In  a  more  highly  developed  form  the  records  are 
kept  by  the  head  storekeeper  or  his  clerical  assistant  either  on 
a  card  system  or  in  a  loose-leaf  ledger,  ruled  specially  for  this 
purpose  as  illustrated  in  Fig.  17  and  usually  known  as  a  Stock 
Ledger.1  Each  page  records  one  part  (or  in  the  case  of  finished 
parts,  one  combination  of  parts)  and,  as  can  be  seen,  it  records 
not  only  all  receipts  and  issues  of  such  part  but  also  such  orders 
as  are  already  placed  for  more  material  of  this  kind,  and  also 
records  any  material  on  hand  that  has  already  been  assigned  to 
work  in  process  or  on  order.  When  a  material  requisition  is 
filled  for  the  shop  it  is  canceled  and  sent  to  the  head  storekeeper, 

1  As  before  noted  the  terms  stock  and  stores  are  used  indiscriminately  in 
practice  and  the  term  stock  ledger  is  used  here  in  this  sense  to  conform  to 
common  usage. 


216     PRINCIPLES   OF   INDUSTRIAL   ORGANIZATION 


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no  record  being  kept  at  the  bin. 
All  invoices,  after  verification  by 
the  receiving  department,  are  also 
sent  to  him  and  thus  all  informa- 
tion regarding  material  and  sup- 
plies is  centralized  at  his  desk. 

This  method  is  usually  adequate 
for  the  needs  of  most  plants;  but 
there  are  cases  where  it  is  desira- 
ble to  carry  the  process  one  step 
farther.  It  will  be  noted  that  the 
above  general  plan  takes  no  note 
of  material  in  process  of  fabrication. 
If  the  plant  makes  large  quantities 
of  finished  parts  of  many  varieties, 
or  if  the  processes  of  manufacture 
are  intermittent,  it  may  be  desira- 
ble to  keep  track  of  these  parts  in 
process  in  order  to  more  intelli- 
gently order  raw  material  and  fin- 
ished parts.  Thus,  a  certain  bin 
might  be  nearly  empty  but  it  would 
not  be  good  policy  to  order,  hast- 
ily, a  large  quantity  of  the  finished 
parts  belonging  therein,  if  a  large 
quantity  was  about  to  be  delivered 
from  some  manufacturing  depart- 
ment of  the  works. 

For  purposes  of  this  kind  a  stock- 
tracing  ledger  is  sometimes  used. 
This  may,  of  course,  be  of  the 
loose-leaf  type  or  may  consist  of 
a  card  system.  On  each  sheet  or 
card  a  record  is  kept  of  the  move- 
ment of  each  lot  of  material  from 
the  time  it  first  leaves  the  store- 
room until  it  is  finally  delivered 


PURCHASING,    ETC.,   OF   MATERIALS          217 

as  finished  parts,  thus  supplementing  the  information  contained 
in  the  stock  ledger.  It  will  be  noted  that  in  the  more  modern 
shop  systems,  using  a  planning  department  and  routing  board, 
information  of  this  kind  is  always  readily  obtainable  from  the 
routing  board.  (See  Article  57.)  The  stock-tracing  ledger  is, 
in  fact,  a  continuous  progress  report  of  parts  that  are  passing 
through  the  factory  in  lots.  It  may  serve  another  valuable 
purpose,  namely,  that  of  showing  what  departments  are  behind 
in  their  work  or  are  under-equipped  either  in  tools  or  men  as 
compared  to  the  remainder  of  the  plant. 

It  was  formerly  considered  sufficient  to  take  an  inventory  of 
the  plant  once  a  year.  Modern  methods  demand  that  the  ac- 
counting system  keep  close  track  of  all  changes  in  the  value  of 
the  plant.  It  is  not  difficult  to  keep  close  records  of  changes  in 
real  estate,  buildings  and  tools,  but  unless  good  stock  ledgers,  as 
described  above,  are  kept,  not  even  an  approximation  can  be 
made  as  to  the  changes  in  the  value  of  the  materials  and  sup- 
plies. By  these  methods,  however,  a  continuous  inventory  may 
be  kept,  the  accuracy  of  which  will,  of  course,  depend  on  the 
detail  to  which  it  is  carried.  A  space  is  always  provided  on 
stock  ledger  sheets  for  evaluating  the  material  listed,  as  shown 
on  the  right-hand  side  of  Fig.  17.  Such  inventories,  while 
sufficient  to  show  the  trend  of  values  should,  however,  be  checked 
periodically  by  an  actual  count  and  visual  evaluation. 

It  is  obvious  that  the  methods,  blanks,  forms,  etc.,  that  may 
be  used  advantageously  in  store-room  and  stock-room  work  will 
vary  widely  with  the  business  and  conditions,  as  indeed  they 
necessarily  must  in  all  business  organizations.  The  methods  sug- 
gested in  the  preceding  paragraphs  have  been  included  more  to 
explain  the  problems  met  in  handling  material  than  to  advocate 
them  as  the  best  for  all  cases.  They  are,  however,  in  successful 
use  in  many  places. 

117.  Economical  Use  of  Material.  The  material  wasted 
around  a  factory  may  be  a  serious  source  of  loss,  particularly  if 
the  material  has  high  intrinsic  value  as  in  the  case  of  copper 
and  brass.  These  wastes  may  be  due  to  several  causes.  It  is 
not  always  possible  to  specify  exactly  just  how  much  of  a  certain 


218    PRINCIPLES   OF   INDUSTRIAL   ORGANIZATION 

material  is  needed  for  a  job  and,  if  a  liberal  amount  is  drawn, 
that  left  over  after  the  completion  of  the  job  is  seldom  returned 
to  the  store-room,  but  collects  on  and  under  benches  and  out  of 
the  way  corners.  In  certain  kinds  of  work,  as  in  punch  press 
processes,  the  material  left  after  the  punched  parts  are  removed 
is  often  as  great  or  greater  than  the  parts  themselves;  and,  if  the 
material  is  valuable,  care  should  be  taken  to  recover  it.  In  all 
cases  systematic  and  constant  effort  should  be  made  to  collect 
and  store  all  scrap  so  as  to  recover  as  much  value  as  possible, 
and  also  to  keep  the  shop  or  factory  clean. 

In  nearly  every  store-room  will  be  found  old  material  for  which 
there  is  no  apparent  use.  This  comes,  usually,  from  two  sources. 
The  first  is  over-ordering  of  material  for  special  jobs.  Special 
material  is  always  a  hazardous  investment  and  care  should  be 
taken  that  no  more  is  ordered  than  will  give  the  minimum  margin 
of  safety.  The  second  most  important  cause  is  a  change  in  de- 
sign. The  engineering  department  can  save  a  great  amount  of 
money  by  carefully  considering  the  question  of  material.  The 
standardization  of  parts,  and  the  use  of  the  same  part  as  often 
as  possible  keep  down  the  value  of  the  inventory;  and  great  care 
should  be  taken  that  no  change  in  design  is  made  that  will  leave 
raw  material,  finished  parts  or  completed  machines  in  danger 
of  obsolescence.  Obsolete  material,  raw  or  worked,  depreciates 
very  rapidly,  completed  machines  often  being  worth  less  than 
the  original  cost  of  the  materials  of  which  they  are  composed. 
Before  scrapping  such  material,  however,  a  report  should  be  sent 
to  the  manager,  approved  by  all  parties  concerned,  giving  the 
inventory  value,  scrap  value  and  loss,  with  the  reasons  and  re- 
sponsibility for  such  loss  clearly  determined. 

The  wasteful  use  of  indirect  materials  and  supplies  is  another 
source  of  great  loss,  especially  in  large  plants.  As  before  noted, 
it  is  a  difficult  problem  to  specify  accurately,  and  supervise  intel- 
ligently, the  drawing  of  expense  material  from  the  stores.  How- 
ever, a  cost-keeping  system  that  furnishes  accurate  records  of 
all  expense  material  is  a  powerful  means  of  regulating  these  ex- 
penditures. The  purchasing  of  expense  material  best  suited  to 
the  needs  of  the  plant  and  their  economical  handling  and  use  is 


PURCHASING,   ETC.,   OF  MATERIALS          219 

a  fruitful  field  of  study  for  the  works  engineer,  and  his  labor  will 
be  greatly  expedited  by  well-kept  records  of  performance  in  all 
branches  of  the  business  from  office  to  power  house.  (See  Article 
47.)  The  problem  of  waste  due  to  poor  workmanship  is  dis- 
cussed in  the  next  article. 


INSPECTION  OF  MATERIALS. 

118.  Reasons  and  Basis  for  Inspection.  As  factories  increase 
in  size  the  problem  of  the  careful  inspection  of  all  materials  be- 
comes one  of  increasing  importance.  In  a  small  shop  the  pur- 
chase of  material  is  usually  conducted  by  a  skilled  man  who  sees 
what  is  purchased  and  if  by  chance  a  lot  of  poor  material  is  pur- 
chased, the  financial  loss  is  not  great.  In  large  plants,  where 
purchasing  is  specialized  and  conducted  by  specifications,  it  is 
of  greatest  importance  that  all  purchased  material  is  carefully 
examined  before  putting  it  into  production,  because  here  the 
loss  may  be  very  great.  For  the  same  reason  it  is  also  imperative 
that  great  care  is  used  to  insure  accurate  workmanship,  where 
the  quantities  are  great.  In  small  plants  it  was,  and  still  is,  the 
practice  to  use  the  final  assembly  of  the  product  as  a  check 
against  poor  workmanship  and  the  final  running  test  as  a  crite- 
rion of  the  fitness  of  the  materials.  Obviously,  no  such  chances 
can  be  taken  in  mass  production.  Furthermore,  there  is  always 
grave  danger  that,  under  modern  intensive  methods  of  pro- 
duction, where  workmen  are  pressed  by  one  cause  or  another 
to  increase  the  output,  the  quality  of  the  product  will  be  lowered. 
This  is  common  experience ;  any  speeding  up  of  productive  proc- 
esses must  be  safeguarded  by  careful  checks  upon  the  quality 
of  the  workmanship.  A  good  inspection  system  will,  therefore, 
check  all  material  as  to  quality,  quantity  and  workmanship, 
from  the  time  it  arrives  at  the  store-room  till  it  is  placed  in  the 
finished  stock-room;  the  detail  in  which  this  is  accomplished, 
and  the  methods  adopted  for  so  doing,  necessarily  vary  greatly 
with  the  industry  and  plant. 

The  requirements  on  which  material  is  inspected  may  be  based 
upon  one  or  all  of  the  following  characteristics: 


220    PRINCIPLES   OF   INDUSTRIAL   ORGANIZATION 

(a)  Quantitative,  i.e.,  as  to  quantity  or  number  of  pieces. 
(6)  Qualitative,  i.e.,  as  to  physical  or  chemical  properties. 

(c)  Dimensional,  i.e.,  as  to  accuracy  of  form  or  finish. 

(d)  Salability,  i.e.,  'as  to  fitness  of  the  finished  product  for  the 
purposes  for  which  it  is  intended. 

In  general,  it  is  not  convenient  or  desirable  to  have  all  inspec- 
tion done  in  one  department  or  by  one  body  of  men,  and  in  most 
large  plants  it  is  divided  into  three  distinct  divisions,  though  the 
work  of  these  divisions  may  overlap  at  times.  Raw  material  is 
usually  inspected  by  the  stores  department  under  the  jurisdiction 
of  the  storekeeper;  dimensional  and  other  manufacturing  in- 
spection is  usually  conducted  by  the  shop  inspectors,  who  are 
directly  under  the  superintendent;  while  the  final  inspection  of 
the  finished  product  may  be  under  another  head.  In  engineering 
works,  and  manufacturing  based  on  scientific  principles,  the  final 
inspection  and  tests  of  performance  are  usually  under  the  direc- 
tion of  the  engineering  or  designing  department. 

119.  Inspection  of  Purchases.     The  skill  and  prudence  of  the 
best  of  purchasing  agents  may  be  greatly  nullified  unless  all 
material  received  is  carefully  verified  both  as  to  quality  and 
quantity.     Many   large  works   have   a  receiving   department, 
which  is  usually  part  of  the  stores  department,  and  under  the  con- 
trol of  the  head  storekeeper.     Here  all  purchased  materials  are 
counted  and  inspected  and  all  articles  not  up  to  the  specifica- 
tions on  which  they  were  purchased  are  rejected.     This  inspec- 
tion may  include  visual  examination  as  to  quantity  and  quality 
or  it  may  extend  to  chemical  and  mechanical  tests,  if  necessary, 
to  determine  whether  the  materials  are  up  to  the  standard  paid 
for.     In  large  works,  manufacturing  interchangeable  apparatus, 
the  careful  inspection  of  such  articles  as  taps  and  dies,  machine 
screws  and  similar  supplies  is  not  only  absolutely  essential  for 
the  sake  of  interchangeability  but  is  a  source  of  great  financial 
saving.     If  possible,  it  is  also  advantageous  to  be  able  to  iden- 
tify materials  that  develop  defects  in  process  of  fabrication,  so 
as  to  make  such  just  claims  on  those  furnishing  them  as  may 
seem  desirable. 

120.  Inspection  During  Manufacture.     Inspection  during  the 


PURCHASING,   ETC.,   OF   MATERIALS          221 

process  of  manufacture  should  be  organized  with  the  following 
considerations  in  mind. 

(a)  To  prevent  unnecessary  hand  work  on  the  assembly  floor. 

(6)  To  inspect  mass-production  operations  in  the  beginning 
and  often  enough  thereafter  to  prevent  any  great  amount  of 
material  being  spoiled. 

(c)  To  prevent  further  work  on  parts  already  spoiled. 

(d)  To  see  that  no  parts  are  lost  in  transfer  from  process  to 
process  and  that  all  are  accounted  for. 

(e)  To  pay  only  for  good  work. 

(/)  To  find  and  locate  imperfections  in  machines  and  proc- 
esses and  lack  of  skill  on  the  part  of  the  workman.  . 

(g)  To  guard  against  the  natural  tendency  of  intensive  pro- 
duction to  cause  a  lowering  of  the  standards  of  accuracy. 

Under  the  older  and  cruder  methods  machine  parts  were  made 
as  accurately  as  the  tools  available  would  allow  and  the  discrep- 
ancies adjusted  with  the  file  or  other  hand  tool  at  assembly. 
To-day,  with  the  demand  that  exists  for  interchangeable  parts, 
such  hand  work  cannot  be  tolerated  and  with  modern  machine 
tools  and  measuring  appliances  it  is  not  necessary,  provided  all 
parts  are  carefully  inspected  when  made.  Furthermore,  it  is 
more  economical,  where  there  is  any  considerable  quantity,  to 
spend  a  little  more  to  insure  accuracy  in  detail  parts,  thereby 
saving  the  annoying,  and  often  very  expensive,  corrections  so 
often  experienced  in  assembling.  It  should  be  noted  that  the 
accuracy  of  component  parts  will  depend  largely  on  the  accuracy 
of  the  tools  furnished  the  workman.  Not  only  the  machine 
tools  but  all  standards  and  gauges  must  be  kept  up  to  exact- 
ness if  accuracy  of  product  is  to  be  maintained. 

It  is  almost  axiomatic  that  the  first  parts  in  mass  production 
should  be  very  carefully  examined,  and  inspection  made  often 
enough  to  insure  that  machines  and  men  are  working  up  to 
the  standards.  Constant  vigilance  is  needed  where  the  parts 
are  numerous  to  prevent  large  quantities  of  spoiled  work. 
When  any  defective  work  is  discovered  it  should  be  set  aside  at 
once  and  no  more  labor  expended  upon  it  until  it  is  definitely 
settled  that  it  can  be  used. 


222     PRINCIPLES   OF   INDUSTRIAL   ORGANIZATION 

Every  workman  should  account  for  all  work  turned  over  to 
him;  and  if  the  inspection  shows  that  any  has  been  spoiled  the 
matter  should  be  settled  then  and  there.  Each  workman  should 
be  held  strictly  accountable  for  the  accuracy  of  his  product;  but 
in  judging  of  these  matters  great  care  should  be  exercised  that 
the  blame  is  not  placed  on  the  workman  when,  perhaps,  it  is  not 
his  fault,  but  the  fault  of  defective  gauges  or  standards  or, 
worse  still,  faulty  verbal  instructions.  Even  though  the  work- 
man is  not  penalized  by  deducting  from  his  pay  the  value  of  the 
spoiled  work  a  systematic  record  of  such  occurrences  is  not  only 
valuable  as  a  guide  for  future  reference  but  has  a  salutory  effect 
upon  the  workman.  Furthermore,  every  effort  should  be  made  to 
remedy  at  once  the  cause  of  the  defective  work  whether  that 
entails  correction  in  machinery  or  instruction  to  the  worker. 
Very  often  the  latter  is  not  an  easy  matter  to  accomplish,  but  it 
is  often  better  to  try  to  help  his  weakness,  and  thus  prevent  a 
recurrence  of  the  difficulty,  than  to  be  satisfied  with  reprimand- 
ing him  or  discharging  him,  to  repeat  the  same  performance  with 
a  new  man. 

Above  all  things,  the  inspection  system  should  be  a  bulwark 
against  the  lowering  of  quality  in  order  to  obtain  quantity. 
As  before  noted  this  is  a  natural  tendency,  under  intensive 
methods.  Before  any  speeding  up  is  tried  careful  consideration 
should  be  given  to  the  matter  of  inspection,  and  proper  provision 
made  in  the  way  of  gauges  and  means  of  applying  them.  Unless 
this  is  done  haste  will  most  assuredly  make  waste.  On  the  other 
hand  inspection  will  not  cause  a  diminution  in  product  if  proper 
facilities  are  provided.  Thus,  to  try  to  hasten  the  output  of  a 
lathe  hand  turning  very  accurate  bearings,  would  be,  in  general, 
an  open  question,  so  far  as  the  resulting  accuracy  is  concerned. 
But  the  installation  of  a  grinding  machine  in  connection  with 
the  lathe  would  not  only  increase  the  production,  but  would 
make  possible  an  accuracy  not  attainable  at  any  rate  of  pro- 
duction by  means  of  the  lathe  alone.  Accuracy  and  output 
cannot  be  considered  apart  from  the  tools  needed  to  produce 
them. 

From  the  foregoing  it  is  almost  obvious  that  an  inspection 


PURCHASING,   ETC.,   OF  MATERIALS          223 

system  that  will  accomplish  these  results  must,  in  most  cases,  be 
organized  apart  from  the  manufacturing  proper,  if  it  is  to  serve 
as  an  effectual  check  upon  wastes  and  bad  work.  Usually, 
therefore,  the  head  inspector  is  put  directly  under  the  superin- 
tendent or  principal  officer  in  charge  of  production  and  reports 
directly  to  him.  (See  Fig.  4.)  Inspection  by  the  foreman,  or 
by  workmen  under  him,  is  likely  to  be  lax  if  not  partial,  since 
the  foreman  himself  is,  in  a  measure,  responsible  for  the  defective 
work.  The  inspector  must  be  a  man  of  firmness  and  decision, 
yet  eminently  fair  in  his  judgment.  .  His  business  should  be  to 
detect  errors  and  defects  and  not  to  cure  the  troubles  from  which 
they  arise,  though  his  suggestions  and  recommendations  may  be 
very  valuable  and  should  be  obtained.  His  authority  regarding 
his  own  work  should,  however,  be  unquestioned  and  for  these 
reasons  it  requires  a  man  of  ability  to  make  a  successful 
inspector. 

The  method  of  conducting  the  inspection  of  material  as  it 
moves  through  the  shop,  and  the  detail  into  which  it  is  neces- 
sary or  remunerative  to  go,  will,  of  course,  vary  greatly  with 
the  requirements  of  the  industry.  The  detail  and  accuracy 
necessary  in  producing  fire-arms  or  watches  would  be,  of  a  ne- 
cessity, much  greater  than  in  manufacturing  pipe  fittings.  This 
is  a  matter  of  judgment  and  cannot  be  fixed  by  rule. 

Leaving  out  of  consideration  the  several  inspection  methods 
that  depend  in  some  measure  on  the  foreman,  or  some  other 
member  of  the  manufacturing  force,  there  are  two  principal 
methods  of  conducting  inspection,  namely,  by  traveling  in- 
spectors or  by  centralized  inspection. 

In  the  first  the  inspector  spends  all  his  time  on  the  shop  or 
factory  floor,  moving  from  place  to  place  as  necessary,  checking 
up  the  initial  parts  as  they  come  from  the  machines  and  checking 
up  the  finished  lots  both  as  to  quality  and  quantity  as  they  leave 
or  arrive  at  each  process.  In  large  works  an  inspector  may  be 
assigned  to  each  department  and  special  benches  and  platforms 
may  be  provided  for  his  convenience  in  checking  over  the  various 
parts.  His  approval  or  disapproval  of  the  work  is  indicated  on 
the  tag  that  accompanies  the  work. 


224     PRINCIPLES   OF   INDUSTRIAL   ORGANIZATION 

In  the  centralized  method  of  inspection  central  inspection 
rooms  are  provided  and  all  work  is  returned  to  the  proper  room 
after  each  operation.  Here  the  inspectors  work  free  from 
any  influence  of  the  shop.  This  method  is  an  advantageous 
one  where  the  parts  are  small  and  the  limits  of  accuracy  close, 
as  in  instrument  work.  If,  however,  the  work  is  large  and  the 
parts  heavy  it  is  obviously  unworkable  and  the  extent  to  which 
one  or  the  other,  or  a  combination  of  both,  should  be  employed  is 
a  managerial  problem  often  requiring  very  good  judgment.  In 
general,  if  the  parts  are  small,  and  the  work  of  transferring  them 
is  not  great,  centralized  inspection  will  be  cheaper  and  more  ac- 
curate; while,  on  the  other  hand,  it  may  not  be  so  effective  in 
forestalling  bad  work  as  the  traveling  inspector  system,  for  rea- 
sons that  are  obvious. 

121.  Performance  and  Assembly  Tests.  In  practically  all 
industries  a  final  examination  is  made  of  the  finished  product 
before  shipment  or  storage.  In  some  classes  of  manufacturing, 
as,  for  instance,  in  making  steam  engines  or  electrical  machinery, 
these  final  inspections  and  tests  may  cover  not  only  the  verifi- 
cation of  refined  scientific  theory,  but  may  include  physical  tests 
of  the  apparatus  as  well.  As  before  noted,  such  final  tests  and 
inspections  are  usually  made  under  the  supervision  of  the  engi- 
neering department  since,  usually,  an  engineer  is  alone  competent 
to  perform  this  work  intelligently,  and  because  the  engineering 
department  is  responsible  for  the  performance  of  the  apparatus. 

The  requirements  of  the  final  test  are  often  set  by  the  pur- 
chaser, and  he  or  his  representative  may  be  present  at  the  test, 
taking  such  information  or  data  as  he  requires  to  satisfy  himself 
as  to  the  characteristics  of  the  product.  Sometimes  this  au- 
thority is  delegated  by  the  purchaser  to  some  insurance  com- 
pany. Thus,  builders  of  boilers  will  furnish  a  paid-up  policy 
in  certain  insurance  companies  for  a  limited  period  of  time. 
Such  a  policy  guarantees  that  the  boiler  has  been  built  and 
inspected  under  the  supervision  of  this  particular  insurance 
company,  which  in  this  manner  becomes  responsible  for  the  per- 
formance of  the  boiler.  The  United  States  and  other  Govern- 
ments always  have  a  corps  of  inspectors  detailed  to  inspect  and 


PURCHASING,   ETC.,   OF  MATERIALS          225 

test  all  apparatus  going  into  the  construction  of  navy  vessels 
when  built  by  private  contractors.  Care  should  be  exercised 
in  taking  contracts  that  the  conditions  of  performance  and  test 
are  not  so  severe  as  to  be  unattainable,  or  attainable  only  at 
an  expense  that  would  make  profit  doubtful. 

122.  Inspection  in  General.  It  should  be  noted  that  inspec- 
tion in  a  general  sense  has  a  much  wider  significance  than 
indicated  even  by  the  foregoing  discussion.  The  general  prin- 
ciples underlying  it  grow  naturally  out  of  the  modern  tendencies 
toward  aggregation  and  specialization  discussed  in  Chapter  V. 
Under  older  and  simpler  methods  the  workman  on  day  wage 
naturally  took  sufficient  time  to  insure  his  accuracy,  and  the 
foreman  or  erection  boss  had  sufficient  time  to  check  the  work. 
Under  high  speed  production  and  greatly  increased  number  of 
parts  these  methods  will  no  longer  suffice.  The  foreman  has 
neither  time  nor,  in  general,  the  information  necessary  to  prop- 
erly inspect  the  product.  Division  of  labor  must  necessarily 
be  resorted  to  as  the  complexity  of  production  increases. 

Furthermore,  mistakes  are  much  more  costly  as  the  number 
of  parts  becomes  greater  and  as  the  design  of  the  product  becomes 
more  scientific  and  complex.  Careful  inspection  of  all  work, 
from  that  of  the  engineering  department  down  to  the  shipping 
department  may  be  justified.  The  careful  examination  of  the 
scientific  basis  l  on  which  machines  are  designed  and  the  in- 
spection of  all  drawings  before  sending  them  into  production 
becomes  a  matter  of  great  importance  as  the  number  of  parts  to 
be  made  becomes  greater.  The  principle  is  universally  ap- 
plicable, but  the  extent  to  which  it  is  desirable  or  remunerative 
to  apply  it  is  a  matter  of  managerial  judgment.  If  the  limita- 
tions are  intelligently  decided,  there  is,  as  a  rule,  no  difficulty  in 
devising  the  necessary  methods  and  appliances  for  a  proper 
execution  of  the  principle. 

Inspection  presupposes  preplanning  and  definite  standards. 
No  inspector  can  be  efficient  unless  he  knows  exactly  the  re- 
quirements of  the  part  concerned  and  has  the  necessary  tools 

1  The  committee  system,  see  Art.  48,  is  a  powerful  means  of  checking  up 
errors  in  design  and  similar  preliminary  work. 


226     PRINCIPLES   OF    INDUSTRIAL   ORGANIZATION 

and  gauges  to  test  its  accuracy.  It  is  a  functionalized  duty, 
that  goes  naturally  with  well-organized  and  well-equipped  estab- 
lishments. The  need  of  accurate  gauges  and  measuring  devices 
and  the  importance  of  keeping  them  properly  .adjusted  is  obvious. 

REFERENCES  : 

The  following  articles  on  store-rooms  and  inspection  methods  may 
be  found  helpful. 

Stores  Management,  by  John  Ashford,  Engineering  Magazine,  Oct., 
1904. 

Theory  of  Stores  Operation,  by  EL  L.  Whittmore,  Engineering  Maga- 
zine, May,  1907. 

Principles  of  Works  Organization,  by  P.  J.  Darlington,  Engineering 
Magazine,  Mar.,  1908. 

Inspection  as  a  Factor  in  Cheap  Production,  by  C.  U.  Carpenter, 
Engineering  Magazine,  July,  1904.  • 

Relation  of  Inspection  to  Money-Making  Shop  Management,  by  A. 
D.  Webb,  Jr.,  Engineering  Magazine,  Feb.,  1907. 


CHAPTER   XIII. 

LOCATION,  ARRANGEMENT  AND    CONSTRUCTION   OF  INDUS- 
TRIAL  PLANTS. 

123.  Industrial  Engineering.     The  importance  of  the  location 
and  arrangement  of  industrial  plants  has  not,  in  general,  re- 
ceived attention  commensurate  with  their  economic  value.     In 
small  shops  that  supply  local  demands  equipment  and  manage- 
ment are  no  doubt  the  most  important  factors  in  economic  pro- 
duction; but  as  plants  have  increased  in  size  and  markets  have 
become  more  widespread,  the  problems  of  transportation  of  both 
raw  and  finished  material  and  the  economic  handling  of  material 
in  process  have  become  increasingly  important.     Questions  re- 
garding power,  labor,  taxes  and  many  others  that  may  be  com- 
paratively unimportant  in  the  small  local  factory  assume  greater 
proportions  when  a  large  undertaking  is  planned. 

!  The  older  and  still  common  custom  of  having  the  manufac- 
turing superintendent  plan  and  build  additions  to  the  plant,  or 
even  to  plan  an  entire  new  'plant,  is  no  longer  adequate  for  best 
results  in  large  undertakings.  The  manufacturing  expert  may 
be  a  good  judge  of  the  necessary  factory  tools  and  appliances, 
but  he  is,  in  most  instances,  poorly  informed  regarding  the  latest 
economies  in  power  plant  construction  or  electric  lighting  and 
similar  correlated  problems  that  have  become  specialities.  The 
location  and  construction  of  a  large  modern  industrial  plant  may 
require  the  services  of  several  specialized  advisers,  and  the  work 
of  directing  such  experts  is  rapidly  coming  to  be  recognized  as 
a  business  in  itself  and  has  been  named  Industrial  Engineering. 

124.  Location  of  Plant.     It  is  well  known  that  industries  of 
different  kinds  tend  to  concentrate  in  different  parts  of  the 
country.     Thus,  spinning,  weaving  and  shoe-making  are  among 
the  great  industries  of  Massachusetts  and  Rhode  Island.     Con- 
necticut has  long  been  a  leader  in  brass  goods,  and  Pennsylvania 

227 


228    PRINCIPLES   OF   INDUSTRIAL   ORGANIZATION 

in  carpets.  On  the  other  hand,  industry  may  move  from  place 
to  place.  In  general,  of  course,  industry  will  follow  population. 
The  centre  of  manufactures  has  moved  steadily  westward  as  the 
country  has  developed,  being  located  by  the  census  of  1900  1 
near  Mansfield,  Ohio.  But,  in  addition  to  this  general  move- 
ment, entire  industries  may  leave  one  locality  and  move  to  an- 
other because  of  economic  conditions.  Thus,  the  New  England 
States  are  no  longer  preeminent  in  certain  fields  of  manufacture 
that  had  their  origin  in  that  section,  economic  relations  between 
raw  material  and  markets  having  given  more  westerly  states 
such  a  manufacturing  advantage  as  to  cause,  in  some  cases,  an 
almost  complete  removal  of  the  industry  to  other  localities.  On 
the  other  hand,  some  of  the  older  states  have  held  firmly  to  man- 
ufacturing industries  for  which  they  possess  no  raw  material, 
against  all  the  competition  of  other  states  possessing  not  only 
raw  material  in  abundance,  but  equal,  if  not  better,  facilities 
for  transporting  the  finished  product  to  market.  The  spinning 
and  weaving  industries  of  some  of  the  New  England  States,  the 
jewelry  and  silverware  industry  of  Rhode  Island  and  the  brass 
industry  of  Connecticut  are  striking  examples  of  this  persist- 
ence. The  trend  of  manufacturing,  geographically,  is,  therefore, 
an  important  factor  in  locating  an  industry  and  is  worthy  of 
careful  consideration  in  locating  a  new  plant  or  moving  an  old 
one. 

The  causes  that  lead  industries  to  concentrate  in  certain  lo- 
calities are  obviously  many  and  complex.2  The  most  important 
of  these  causes  are  —  nearness  to  markets,  nearness  to  raw  ma- 
terials, the  supply  of  labor  and  cheap  power  either  from  water- 
falls or  from  cheap  fuel. 

The  first  two  are  of  course  fundamental.  Without  material, 
manufacturing  is  impossible  and  without  markets  it  is  useless. 
They  are,  also,  of  prime  importance,  economically,  in  localizing 
industry  within  a  comparatively  limited  area.  Other  things 
being  equal,  industry  naturally  locates  near  the  market  it  serves, 
since  it  must,  necessarily,  be  the  result  either  of  a  demand  from 

1  See  12th  Census  of  the  United  States,  p.  CLXXI. 

2  For  an  extended  discussion  of  this  matter  see  12th  Census  of  U.S.,  p.  CCX, 


LOCATION,   ETC.,   OF  INDUSTRIAL   PLANTS    229 

the  market  or  an  effort  to  create  such  a  demand.  The  location 
of  the  supply  of  raw  material  has  usually,  however,  a  modifying 
influence,  and  the  result  is  often  a  compromise  which  is  also 
affected  greatly  by  the  question  of  transportation.  Clearly, 
there  is  no  economy  in  shipping  bulky  raw  material  great  dis- 
tances if  the  larger  part  of  it  becomes  waste  in  the  process  of 
manufacturing.  For  this  reason  industries  such  as  paper  making 
that  depend  on  forest  products  are  likely  to  be  found  near  the 
forests.  Packing  houses  are  placed  near  stock  raising  centers 
and  pottery  industries  near  clay  beds.  On  the  other  hand, 
wool  grown  in  the  western  states  can,  perhaps,  be  more  eco- 
nomically manufactured  at  present  on  the  Atlantic  seaboard. 
In  the  case  of  copper  products  the  ore  is  reduced  near  the  mine, 
since  its  transportation  for  any  great  distance  is,  in  general, 
prohibitive.  The  ingot  copper  obtained  in  Montana,  for  in- 
stance, may  be  economically  -transported  to  Connecticut,  manu- 
factured into  many  kinds  of  products  and  the  small  portion  of 
these  products  used  in  Montana  shipped  back  to  that  state  for 
consumption.  It  is  also  obvious  that  the  influence  of  these  two 
items,  nearness  to  markets  and  nearness  to  raw  materials,  grows 
less  as  the  question  of  transportation  becomes  less  important 
economically.  If  the  transportation  charges  are  small  then  one 
or  the  other  or  both  of  the  last  two  influences,  labor  and  power, 
may  be  predominating  factors  and  both  raw  material  and  fin- 
ished product  may  be  economically  transported  considerable 
distances  to  take  advantage  of  the  market.  It  is  a  rare  instance, 
however,  when  the  influence  of  any  one  of  these  causes  fixes 
definitely  the  geographical  location  of  an  industry.  Each  case 
presents  combinations  of  its  own  that  must  be  carefully  consid- 
ered in  making  a  decision.  As  will  be  seen,  presently,  these  last 
two  influences,  labor  and  power,  also  affect  the  exact  location 
of  an  industry  within  the  somewhat  wide  geographical  limits 
fixed  by  the  above  general  considerations. 

As  before  noted  the  economic  conditions  that  lead  to  the  es- 
tablishing of  an  industry  may  change,  especially  in  a  new  coun- 
try like  America.  If  these  economic  changes  are  great  enough, 
they  may  so  influence  industry  as  to  make  it  migrate  long  dis- 


230     PRINCIPLES   OF   INDUSTRIAL   ORGANIZATION 

tances.  On  the  other  hand  industries  often  persist  and  prosper 
long  after  the  economic  balance  is  apparently  greatly  against 
their  location.  Of  the  above-named  influences  that  tend  to 
give  inertia  to  established  industry,  labor  supply  is,  perhaps, 
the  most  important.  It  takes  time  to  build  up  an  industrial 
community  and  once  built  up  it  is  not  so  easy  to  transport  as  it 
is  to  transport  machinery.  Skilled  workmen  will  not,  as  a  rule, 
leave  their  native  environment  without  a  considerable  increase 
in  wages  and  even  then  they  easily  become  discontented  and 
return  home  if  the  surroundings  are  not  congenial.  There  is, 
therefore,  a  certain  amount  of  inertia  that  attaches  itself  to  in- 
dustry when  it  has  once  been  successful  in  a  given  place.  Many 
of  the  early  manufacturing  enterprises  of  New  England  were 
started  in  one  place  or  another  simply  by  chance  circumstances. 
The  enterprise  prospered,  others  grew  up  By  imitation,  or  as 
branches,  specialization  brought  in  subsidiary  occupations,  a 
large  amount  of  local  capital  became  interested,  the  whole 
movement  gathering  an  inertia  that  often  more  than  compen- 
sated for  lack  of  other  economic  advantages.  It  is  by  influences 
such  as  these  that  New  England  has  stubbornly  and  successfully 
held  the  supremacy  in  certain  lines  of  manufacturing,  though 
the  economic  advantages  leading  to  their  establishment  have  in 
great  measure  passed  to  other  states.  In  a  general  way  people 
are  likely  to  feel  confidence  in  an  industry  that  is  being  started 
in  a  locality  where  similar  ventures  have  been  successful  and 
this  adds  to  the  momentum  noted  above. 

It  should  be  noted,  however,  that  as  any  country  develops 
industrially,  as  transportation  becomes  more  effective  and  good 
labor  supply  more  widespread,  the  intelligent  location  of  manu- 
facturing enterprises  must  be  governed  increasingly  by  strict 
economic  considerations  and  less  by  inherited  influences.  This 
can  be  more  readily  seen  by  considering  the  establishment  of  a 
new  industry  in  which  the  inertia  of  age  has  not  appeared. 

For  these  reasons,  also,  the  water-powers  and  other  sources  of 
cheap  power  are  sure  to  increase  in  value  as  coal  becomes  more 
expensive.  New  England  owes  her  manufacturing  greatness 
in  no  small  measure  to  the  manufacturing  advantages  obtained 


LOCATION,   ETC.,   OF   INDUSTRIAL   PLANTS     231 

from  her  abundant  waterfalls.  Cheap  coal  has  given  other  lo- 
calities an  equal  or  greater  advantage,  temporarily;  but  these 
water-powers  and  others  in  the  country  are  sure  to  be  of  increas- 
ing strategetic  importance  in  the  future  and  western  cities  that 
owe  their  existence  to  great  waterfalls  have,  therefore,  a  reason- 
able assurance  of  continued  prosperity  as  the  country  develops 
around  them. 

While  the  above  considerations  operate  to  locate  industries 
within  comparatively  wide  areas,  some  of  them,  in  connection 
with  other  influences,  must  also  be  considered  in  fixing  the  exact 
location  of  the  plant  within  the  given  area.  Among  the  many 
considerations  that  may  influence  the  exact  location  the  follow- 
ing may  be  noted: 

(a)  Transportation  facilities. 

(6)  Initial  building  requirements  and  possibility  of  expansion. 

(c)  Labor  supply. 

(d)  Dependence  on  other  industries. 

(e)  Financial  considerations. 

(/)  Relative  value  of  community  restrictions  and  aid. 

(g)  Relative  value  of  local  markets. 

A  more  coherent  idea  of  the  relative  value  of  these  several 
influences  may  be  obtained  by  considering  the  relative  merits 
of  the  three  classes  of  location  open  to  the  prospective  manu- 
facturer, namely  —  city,  country  or  suburban. 

Cities  being  natural  centers  for  trunk  lines  or  water  transpor- 
tation usually  offer  superior  advantages  for  obtaining  raw  ma- 
terials and  shipping  finished  goods.  An  abundant  labor  supply 
is  obtainable  as  compared  to  other  localities.  If  the  plant  is 
small  and  dependent  on  other  industries  as,  for  instance,  repair 
shops,  or  some  closely  articulated  industry,  the  city  offers  superior 
advantages,  when  these  other  industries  are  present,  as  they 
usually  are.  It  is  often  easier  to  finance  an  undertaking  in  the 
city;  cities  offering  better  fields  for  obtaining  subscriptions  to 
stock  or  obtaining  special  inducements  to  locate,  such  as  ex- 
emption from  taxes  or  even  large  cash  bonuses  to  assist  in  start- 
ing the  enterprise.  If  the  plant  is  small,  and  is  supplying  the 
local  market  alone,  the  city  offers  market  advantages  that  would 


232     PRINCIPLES   OF   INDUSTRIAL   ORGANIZATION 

not  be  so  important  to  a  larger  plant.  A  plant  located  in  a  city 
enjoys  municipal  advantages  such  as  good  streets,  sewers,  gas, 
police  protection,  fire  protection,  etc. 

As  opposed  to  these  advantages  the  city  location  has  the  dis- 
advantage that  land  is  high-priced,  and  it  is  very  often  difficult 
for  large  works  to  secure  a  site  within  a  city  where  buildings 
exactly  suited  to  the  purpose  desired  can  be  erected  without 
great  expense;  and  if  the  city  is  a  growing  one  the  taxes  in  time 
make  the  location  too  expensive.  This  is  one  of  the  reasons  why 
many  factories  have,  within  recent  years,  been  compelled  to 
move  to  the  country  or  the  suburbs.  City  restrictions  regarding 
smoke  and  other  municipal  ordinances  governing  industry  are 
questions  that  must  be  carefully  considered.  While  labor  may 
be  abundant  in  the  city  the  cost  of  living  and  hence  the  wages 
paid  are,  in  general,  higher  than  in  the  country. 

The  advantages  of  a  location  in  the  country  are  not  so  nu- 
merous as  those  of  the  city,  but  they  are  often  of  paramount 
importance.  Thus,  if  a  water-power  is  obtainable  or  if  a  supply 
of  pure  water  is  necessary,  as  in  paper  making,  a  country  site 
may  be  very  desirable.  Land  is  cheap  in  the  country  and  hence 
the  factory  can  be  built  to  suit  the  exact  needs  of  the  industry 
and  ample  provision  made  for  growth.  Taxes  are  low  and  re- 
strictive ordinances  not  likely  to  hamper  the  activity  of  the 
plant.  The  larger  the  plant  the  less  it  is  dependent  on  other 
industries  and  hence  the  country  site,  in  general,  appeals  to  the 
large  operator  more  than  to  a  small  one.  The  local  market  is, 
likewise,  likely  to  be  of  less  interest  to  the  large  plant.  Undesir- 
able neighbors  can  be  more  easily  avoided  in  a  country  location 
and  the  danger  from  fire  and  other  hazards  resulting  from  sur- 
rounding industries  are  also  minimized. 

On  the  other  hand  the  labor  supply  of  the  country  is  usually 
a  troublesome  problem.  The  city  offers  advantages  and  amuse- 
ments to  the  working  classes  that  cannot  be  had  in  the  country. 
An  effort  is  often  made  to  offset  these  attractions  by  building 
model  factory  villages  where  employees  may  acquire  homes  on 
easy  terms  and  enjoy  the  healthful  life  of  the  country.  Of  course 
the  employer  that  engages  in  such  an  enterprise  must  expect  to 


LOCATION,   ETC.,   OF  INDUSTRIAL  PLANTS     233 

feel  a  greater  responsibility  toward  his  employees  than  he  would 
in  a  city  where  the  bond  is  much  looser.  But  such  work  as  this 
is  worth  while,  and  no  doubt  the  near  future  will  see  a  great 
amount  of  decentralizing  of  industry  from  the  thickly  congested 
centers  in  favor  of  country  locations.  Just  as  it  is  difficult  to 
induce  labor  to  leave  the  cities,  so  it  is  difficult  to  attract  them 
away  from  good  country  industries  if  the  conditions  of  life  are 
made  attractive;  and  labor  troubles  are  likely  to  be  less  in  a 
country  location  than  in  a  congested  city. 

The  suburbs  of  many  cities  offer  a  compromise  between  the 
city  and  country  and  possess  many  of  the  benefits  of  both. 
Land  can  be  obtained  at  a  price  far  below  city  property,  and 
trolley  lines  have  made  living  in  the  suburbs  cheaper  than  in  the 
city,  and  yet  made  it  possible  for  the  suburban  dweller  to  take 
advantage  of  the  attractions  of  the  city.  An  examination  of 
any  of  our  large  cities  will  show  an  immense  amount  of  manu- 
facturing in  the  suburbs,  this  location  being  particularly  ad- 
vantageous for  fair-sized  plants. 

£^From  the  above  it  will  appear  that  the  city  location,  in  general, 
offers  greatest  attractions  to  the  small  plant,  the  suburbs  are 
best  adapted  to  fair-sized  plants,  and  the  country  offers  by  far 
the  greatest  attraction  and  fewest  disadvantages  to  the  very 
large  plant,  provided  an  adequate  supply  of  labor  can  be  obtained'^ 

It  is  not  possible  to  formulate  the  requirements  of  factory'" 
locations  as  regards  levelness  of  the  land,  character  of  the  soil, 
etc.,  since  some  of  these  vary  widely  with  the  needs  of  the  in- 
dustry. Some  industries,  such  as  ore  concentrating  plants,  re- 
quire a  steep  hill-side  in  order  to  utilize  gravity.  Other  plants 
must  have  a  flat  plot  of  ground.  One  of  the  most  successful 
plants  that  the  writer  knows  of  is  built  on  solid  rock  at  a  consid- 
erable expense  for  excavating;  another  equally  successful  stands 
on  made  ground  covering  a  veritable  bog.  If  all  the  other 
economic  features  of  the  site  are  satisfactory  these  conditions 
are,  in  most  cases,  not  so  important  unless  the  cost  of  preparing 
the  site  is  excessive.  Large  cities  have  been  built  on  very  poor 
soil  simply  because  of  the  strategetic  importance  of  the  spot  or 
from  the  accident  of  original  location.  Care  should  be  exercised, 


234     PRINCIPLES   OF   INDUSTRIAL   ORGANIZATION 

however,  that  the  factory  site  chosen  is  well  protected  from  such 
occasional  accidents  as  floods.  One  of  the  largest  manufac- 
turing companies  in  this  country  has  lost  large  sums  of  money 
by  occasional  inundation  and  has  spent  large  sums  in  making 
its  site  safe  against  periodic  occurrence  of  such  disasters,  the 
plant  being  now  so  large  that  it  would  be  too  expensive  to  move 
elsewhere. 

ARRANGEMENT  OF  BUILDINGS  AND  PLANT. 

125.  Adaptation  of  Building.  The  degree  to  which  it  is  possible 
to  adapt  a  building  to  the  exact  needs  of  an  industry  will  depend 
upon  the  character  of  the  industry;  the  desirability  of  adapting 
a  building  to  conform  closely  to  the  needs  of  any  given  line  of 
work  will  depend  upon  the  probable  permanency  of  the  industry. 
Most  enterprises  that  start  in  a  small  way  begin  work  in  rented 
quarters.  Owners  of  such  buildings  most  naturally  build  them 
to  suit  average  conditions  of  manufacture  and  are  usually  averse 
to  making  changes  that  destroy  their  flexibility.  Anyone  ac- 
quainted with  urban  manufacturing  has  seen  many  efforts  by 
manufacturers,  that  have  acquired  such  properties,  to  remodel 
them  to  suit  their  needs  more  closely;  and  it  is  common  experience 
that  when  a  manufacturer  builds  a  new  plant  to  replace  his  old 
one  he  most  naturally  makes  a  strong  effort  to  adapt  the  new 
plant  closely  to  the  needs  of  his  business.  It  is  coming  to  be 
more  fully  realized  that  the  factory  is  not  simply  a  building  to 
house  machinery  but  is  an  integral  part  of  the  manufacturing 
equipment  and  may  exert  a  great  influence  upon  economic  pro- 
duction. 

It  was  noted  in  Article  40  that  manufacturing  methods  may 
be  divided  into  continuous  and  intermittent  processes.  In  con- 
tinuous processes  the  material  goes  in  at  the  receiving  end  of 
the  plant,  is  worked  continuously,  and  appears  at  the  shipping 
room  as  finished  product.  In  intermittent,  or  interrupted  proc- 
esses, various  materials  may  be  worked  to  varying  stages  of 
completion  and  stored  away,  the  machinery  working  on  one 
article  today  and  another  tomorrow  and  assembly  into  finished 
products  being  carried  on  as  is  found  necessary. 


LOCATION,   ETC.,   OF  INDUSTRIAL  PLANTS    235 

Buildings  are  more  easily  adapted  to  fit  the  needs  of  contin- 
uous processes  than  to  those  of  any  other.  This  is  well  illus- 
trated in  ore  concentrators  where  the  building  usually  conforms 
closely  to  the  requirements  of  the  machinery  it  encloses.  Sugar 
refineries,  flour  mills,  steel  rail  mills  and  packing  houses  are  ex- 
amples of  continuous  industries  where  buildings  often  are  closely 
adapted  to  the  needs  of  the  industry,  and  may  often  be  so  closely 
adapted  as  to  be  useless  for  any  other  purpose.  At  the  other 
extreme  are  many  industries  that  consist  principally  of  assem- 
bling operations,  little  machinery  being  employed,  and  that  of 
small  size,  the  entire  business  consisting  of  small  self-contained 
production  centers.  Floor  space  is  the  principal  requirement 
and,  within  limits,  the  building  may  be  any  shape.  In  some  of 
these  industries  the  density  of  the  workers  is  almost  the  only 
limiting  factor,  so  much  so  that  legal  restrictions  are  in  force 
in  many  states  to  regulate  the  congestion  possible  in  these  call- 
ings. Between  these  extremes  come  all  manner  of  manufac- 
turing processes,  each  presenting  a  different  combination  of  needs. 
The  possibility  and  desirability  of  adapting  the  building  to  suit 
these  needs  cannot,  in  general,  be  formulated,  the  best  solution 
usually  being  a  compromise  that  cannot  be  arrived  at  without 
intimate  knowledge  of  the  manufacturing  problems  presented 
and  the  financial  conditions  of  the  owner. 

126.  Arrangement  of  Equipment.  The  construction  of  a 
building  perfectly  adapted  to  a  given  industry  presupposes  a 
perfect  knowledge  of  the  character  and  capacity  of  the  several 
machines  or  processes  to  be  used  and  the  logical  arrangement 
that  must  be  made  with  them  so  as  to  carry  the  material  through 
the  plant  most  economically. 

In  continuous  processes  this  information  is  comparatively 
easy  to  obtain  since  the  capacity  of  each  machine  or  set  of  ma- 
chines devoted  to  any  part  of  the  work  must  bear  a  definite  re- 
lation to  other  machines  or  groups  of  machines,  or  the  other 
factors  of  the  process;  and  the  nature  of  the  process  usually 
dictates  the  natural  sequence  of  operations,  or  suggests  such 
handling  or  conveying  devices  as  may  be  needed  to  keep  the  proc- 
ess continuous.  In  the  other  extreme  cases,  where  assembling 


236    PRINCIPLES   OF   INDUSTRIAL   ORGANIZATION 

is  the  predominating  factor,  the  problem  is  still  easier;  since  here 
sequence  is  not  a  factor,  the  production  units  are  small  and  the 
output  a  computable  quantity.  In  intermittent  manufactur- 
ing, however,  this  problem  is  often  most  difficult  and  always 
deserves  more  consideration  than  is  usually  accorded  to  it,  not 
only  in  securing  a  balanced  equipment  but  also  to  obtain  any 
approach  to  a  flow  of  material  through  the  plant  with  a  minimum 
of  transportation  expense.  Obviously,  here,  also,  no  definite 
rules  or  methods  can  be  evolved  for  solving  such  problems  but 
there  are  certain  general  principles  that  apply  to  all  plants  and 
which  may  be  worth  noting. 

In  planning  new  buildings,  or  making  extensions  to  old  ones, 
it  is  quite  common  practice  to  calculate  the  new  floor  space  by 
reference  to  other  plants  of  the  same  kind.  The  floor  area  per 
ton  of  output,  the  floor  area  per  employee  or  the  floor  area  per 
dollar  of  output  are  often  taken  as  standards  for  determining 
new  floor  area.  Clearly,  such  standards  should  be  used  with 
care,  especially  if  they  are  taken  from  plants  of  which  the  de- 
signing engineer  has  little  or  no  knowledge.  Such  data  are  very 
valuable  if  their  source  and  limitations  are  known  but  in  all  cases 
they  should  be  used  with  caution.  Conditions  vary  greatly  in 
different  plants  making  the  same  article.  The  degree  of  inte- 
gration1 may  be  vastly  different,  the  equipment  either  more 
antique  or  more  modern.  New  tools,  new  methods  and  new 
pay  systems  may  make  any  calculations  based  on  old  perform- 
ances useless.  It  is  much  safer,  usually,  to  base  all  such  com- 
putations of  output  on  the  actual  capacities  of  machinery  and 
processes  to  be  installed,  adapting  the  building  to  suit  the  ar- 
rangement of  the  same  as  far  as  desirable. 

There  are  two  distinct  methods  of  grouping  machines  that 
strongly  affect  not  only  the  arrangement  of  the  factory  but  also 
its  administration.  In  the  first  method  all  machines  of  the  same 
kind  and  approximate  size  are  grouped  together.  Thus  all  lathes 
up  to  24-inch  swing  may  be  in  one  group,  all  semi-automatic 
lathes  in  another,  all  large  lathes  in  another,  all  planing  machines 
in  another  and  so  on.  In  other  words  the  arrangement  is  based 

1  See  Article  113. 


LOCATION,   ETC.,   OF  INDUSTRIAL   PLANTS    237 

on  the  processes  performed.  In  the  second  method  the  ar- 
rangement of  tools  is  based  on  the  character  of  the  finished  prod- 
uct. Thus,  a  department  building  arc  lamps  would  have  its  own 
equipment  of  machinery,  specially  adapted  to  its  needs,  another 
building  transformers  would  have  its  own  equipment,  another 
building  switches  would  have  its  own  equipment,  each  entirely 
independent  of  the  other  and  each  department  in  a  measure  self- 
sustaining  as  far  as  machine  processes  are  concerned. 

It  is  almost  obvious  that  the  first  method,  if  applicable,  is  by 
far  the  most  economical.  Fewer  tools  of  a  given  kind  will  be 
required,  since  the  possibility  of  keeping  all  machines  in  con- 
tinuous operation  is  a  maximum  under  this  method.  The  cost 
of  superintendence  will  be  less  and  the  workmanship,  in  general, 
will  be  better  since  the  possibilities  of  specialization  are  greater 
with  this  arrangement.  It  is  to  be  especially  noted  that  the 
success  of  this  form  of  machine  grouping  rests  to  a  large  extent 
on  the  accuracy  with  which  the  machining  is  done;  and  that 
again  depends  on  the  equipment  of  gauges  and  standards.  Mod- 
ern refined  methods  of  machining  with  limit  gauges  and  other 
accurate  measuring  devices  have  made  this  form  of  grouping 
possible  to  an  amazing  degree  as  compared  with  former  manu- 
facturing facilities.  A  rigid  application  of  this  departmental 
principle  is  seldom  possible  or  desirable,  however,  and  many 
departments  devoted  primarily  to  one  kind  of  work  often  need 
a  few  tools  of  another  kind  for  emergencies,  or  to  save  time. 
Thus,  an  erecting  floor  must  often  have  a  few  drill  presses  or 
lathes,  near  by,  where  corrections  and  adjustments  can  be  made. 
In  refined  continuous  manufacturing  this  form  of  grouping  is 
often  carried  out  almost  to  perfection.  In  intermittent  manu- 
facturing compromises  may  have  to  be  made  and  a  careful  con- 
sideration of  the  relative  merits  of  the  two  methods  will  often 
save  money  in  equipment  and  greatly  facilitate  production. 

When  the  equipment  of  each  department  has  been  selected, 
with  the  above  considerations  in  mind,  the  internal  arrange- 
ment of  each  department  can  be  completed  tentatively,  at  least, 
due  consideration  being  given  to  transportation,  storage,  power, 
etc.  The  floor  space  so  determined  can  be  compared  with  sim- 
ilar departments  if  such  data  are  obtainable. 


238    PRINCIPLES   OF   INDUSTRIAL   ORGANIZATION 

Particular  attention  should  be  paid  to  the  safety  of  the  em- 
ployees if  the  machinery  is  of  a  dangerous  nature.  It  pays,  in 
all  cases,  to  provide  ample  room  around  machines,  or  in  shops 
generally,  so  that  work  is  not  crowded  together  too  closely;  and 
if  safety  of  life  or  limb  is  concerned  extra  care  should  be  exer- 
cised that  there  is  ample  room  to  handle  the  work  in  safety. 

127.  Sequence  of  Processes  —  Routing.  With  the  equipment 
of  the  several  departments  selected  and  tentatively  arranged  it 
will  remain  to  arrange  the  several  departments  with  reference 
to  each  other  so  that  the  material  will  pass  through  the  plant 
with  a  minimum  amount  of  traveling  and  handling,  and  so  that 
the  factory  shall  work  smoothly  as  a  whole.  This  conception 
of  the  plant  itself  as  a  machine  is  a  helpful  one.  There  are  many 
existing  factories  where  a  careful  analysis  and  rearrangement  of 
the  plant  along  the  lines  suggested  would  work  wonders.  Old 
factories  that  have  grown  up  from  small  beginnings  are  very 
likely  to  be  organized  too  much  according  to  personality.  While 
personality  is  valuable  in  itself,  it  is  not  sufficient.  A  chief  en- 
gineer may  be  exceedingly  able,  but  he  cannot  produce  power 
economically  unless  his  machinery  is  of  the  right  kind  and  prop- 
erly arranged,  and  the  same  idea  applies  equally  well  to  manu- 
facturing. 

As  before  noted,  the  ideal  sequence  is  obtained  in  some  con- 
tinuous processes,  the  building  following  the  sequences  naturally 
or  the  two  being  mutually  adapted  to  each  other.  This  is  well 
illustrated  in  Fig.  18  which  shows  the  cross  section  of  a  stamp 
mill  for  working  gold-  and  silver-bearing  ores,  and  built  on  a  hill- 
side in  order  to  use  the  force  of  gravity  in  carrying  the  ore  through 
the  processes.  The  building  is  made  to  conform  closely  to  the 
needs  of  the  process,  not  only  as  to  housing  the  machinery  but 
as  to  supporting  the  shafting,  etc.  The  building  is,  in  fact,  one 
element  in  a  large  machine.  The  ore  is  delivered  from  cars  to 
the  bin  A,  passing  thence  through  the  rough-crushing  rolls  B 
to  the  bin  C.  From  this  bin  it  passes  through  the  stamps  D. 
Water  is  added  during  this  stamping  process  and  the  finely  di- 
vided product  consequently  runs  easily  down  to  the  concentra- 
tors E  where  the  lighter  particles  of  rock  are  removed,  the  ore 


LOCATION,   ETC.,   OF  INDUSTRIAL  PLANTS     239 

passing  on  to  the  tanks  F.  From  here  the  ore  passes  into  the 
grinding  pans  (7,  where  it  is  still  further  reduced  in  fineness  in 
contact  with  mercury,  the  latter  amalgamating  with  the  free 


gold  1  and  silver  and  forming  an  amalgam  that  is  separated 
from  the  waste  rock  by  gravity  action  in  the  settling  and  clean- 
up pans  H  and  /.  The  mercury  is  distilled  from  the  amalgam 


Some  of  the  free  gold  is  caught  by  amalgam-covered  plates  at  the  stamp. 


240    PRINCIPLES   OF   INDUSTRIAL   ORGANIZATION 

in  a  retort  placed  in  an  adjoining  building,  not  shown,  and  the 
remaining  bullion  is  cast  into  ingots. 

It  is  obvious  that  no  such  sequence  or  adaptation  of  building 
can  be  secured  in  the  average  case  of  intermittent  production, 
many  compromises  usually  being  necessary.  The  general  prin- 
ciple, however,  should  be  applied  as  far  as  possible,  particularly 
if  a  well-developed  planning  and  routing  department  is  proposed. 
This  is  true,  not  only  of  factories  housed  entirely  in  one  building, 
but  also  of  large  plants  occupying  many  buildings,  with  the 
added  consideration  of  proper  yard  room  and  perhaps  railroad 
connections.  One  application  of  this  general  principle  is  shown 
suggestively  in  Fig.  19,  which  may  represent  any  machine  works 
making  a  line  of  product,  such  as  steam  engines,  in  many  sizes, 
large  and  small,  and  of  several  varieties.  Here  the  material 
comes  in  at  A  and  the  finished  product  goes  out  at  B,  the  gen- 
eral movement  being  from  right  to  left,  and  motion  in  the  re- 
verse direction  occurring  only  where  storage  is  necessary;  though 
even  this  can  sometimes  be  obviated  or  minimized.  In  addition 
to  the  standard  railroad  connections  shown  the  plant  would  be 
equipped  with  an  industrial  railway  for  internal  transportation 
and,  of  course,,  with  cranes  and  other  handling  devices. 

As  plants  grow  in  size  these  principles  may  be  of  increasing 
importance,  particularly  if  the  work  approximates  a  continuous 
process.  Thus,  in  the  Gary  plant  of  the  Indiana  Steel  Com- 
pany the  open  hearth  furnaces  are  set  at  an  angle  with  the  blast 
furnace  and  finishing  mills  in  order  to  obtain  an  arrangement  of 
tracks  over  which  material  can  be  transported  at  a  high  rate  of 
speed.1  In  other  large  plants,  on  the  other  hand,  these  prin- 
ciples cannot  be  applied  to  the  plant  as  a  whole.  Thus,  the 
works  of  the  General  Electric  Company  at  Schenectady  manu- 
facture such  a  variety  of  goods,  in  so  many  sizes,  that  flow  of  ma- 
terial through  the  plant  as  a  whole  is  out  of  the  question.  In 
this  plant  the  buildings  are  placed,  for  the  most  part,  at  right 
angles  to  a  central  avenue,  and  transportation  between  shops 
is  effected  by  a  very  complete  system  of  electrically  operated 
cars.  If  a  part  is  to  be  moved  at  all  on  a  car  it  makes  little  dif- 
1  See  System,  January,  1909,  p.  10. 


LOCATION,   ETC.,   OF   INDUSTRIAL   PLANTS    241 


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242     PRINCIPLES   OF   INDUSTRIAL   ORGANIZATION 

ference  whether  the  destination  is  in  one  shop  or  another,  once 
it  is  placed  on  the  car. 

If  the  plant  under  consideration  is  a  new  one  care  should  be 
taken  to  provide  ample  facilities  for  additions  and  extensions  in 
such  a  manner  that  the  equipment  may  be  kept  balanced  with- 
out serious  rearrangement.  Thus,  in  Fig.  19,  extensions,1  such 
as  are  shown  by  the  dotted  lines,  can  be  made  without  changing 
the  original  plan  of  the  works.  An  ideal  building  plan  is  one 
built  on  some  "  unit  "  system,  like  a  sectional  bookcase  so  that 
additional  units  can  be  added  at  any  time  without  disturbing 
the  manufacturing  system  and  organization.  A  little  fore- 
handed planning  of  this  kind  will  often  save  large  sums  when 
additions  or  extensions  are  necessary. 

128.  Building  Construction.  The  machinery  that  is  selected 
and  its  arrangement  will  determine  the  characteristics  of  the 
building  as  to  size,  strength  and  general  structure.  Experience 
has  reduced  the  types  of  factory  buildings  to  a  comparatively 
small  number  but  a  brief  discussion  even  of  these  few  types  is 
beyond  the  scope  of  this  work.  It  is  evident,  however,  that 
buildings  of  any  one  type  will  vary  greatly  depending  on  the 
character  of  work  they  house  and  with  the  financial  condition 
of  the  builder.  Not  even  approximate  rules  can  be  laid  down 
as  to  what  the  structural  characteristics  of  a  building  must  be 
to  best  solve  the  problem  in  hand.  There  are,  however,  certain 
general  considerations  that  should  be  kept  in  mind  in  designing 
any  factory  building,  aside  from  the  consideration  of  strength 
and  stiffness  against  vibrations,  namely: 

(a)  Fire  protection. 

(6)  Good  lighting,  heating  and  ventilating. 

(c)  Sanitary  conveniences  for  employees. 

(d)  Appearances. 

Volumes  could  and  are  written  on  each  of  these  items,  but  the 
briefest  mention  must  here  suffice.  It  is  unnecessary  to  urge 
the  need  of  a  careful  consideration  of  the  danger  of  fire  in  planning 
any  building  and  of  considering  the  danger  of  a  conflagration 

1  The  works  of  the  Allis-Chalmers  Co.,  at  Milwaukee,  are  laid  out  on  a 
plan  similar  to  Fig.  19. 


LOCATION,   ETC.,   OF  INDUSTRIAL   PLANTS    243 

spreading  from  one  building  to  another.  The  modern  tendency 
is  toward  fire-proof  structures  of  steel  or  concrete  or  combina- 
tions of  these  materials,  though  good  results  may  be  obtained 
by  the  slow-burning  timber  construction  so  common  in  New 
England  mills.  Too  much  care  cannot  be  bestowed  upon  fire- 
fighting  appliances,  such  as  sprinkler  systems,  and  most  of  the 
large  manufacturing  plants  have  not  only  elaborate  systems  of 
this  kind  but  keep  a  completely  equipped  fire  engine  and  well- 
drilled  fire  companies. 

It  is  impossible  to  over-estimate  the  value  of  abundant  light, 
heat  and  ventilation.  These  things  were  looked  on,  only  too 
often  in  former  days,  as  luxuries,  and  the  cold,  dark,  ill-smelling 
shops  so  common  a  few  years  ago  were  in  most  cases  mistaken 
efforts  in  economy.  It  is  true  that  modern  building  construc- 
tion has  made  the  lighting  of  factories  a  comparatively  easy  mat- 
ter, but  it  is  important  that  builders  keep  in  mind  that  light, 
heat  and  ventilation  pay  dividends.  Great  care  was  taken  in 
times  past  that  clerks  on  small  salaries  were  comfortably  housed, 
and  they  would  not  have  been  expected  to  do  good  work  unless 
so  cared  for;  while  high  priced  mechanics  were  only  too  often 
expected  to  produce  good  results  in  spite  of  all  sorts  of  physical 
discomfort  and  inconveniences.  There  is  no  difference  between 
the  psychology  of  the  office  and  that  of  the  shop.  Workmen 
can,  naturally,  produce  more  and  better  work  in  well-warmed, 
well-lighted  and  well-ventilated  rooms,  and  this  is  in  no  small 
measure  due  to  an  improved  mental  outlook  that  necessarily  goes 
with  improved  physical  surroundings.  In  the  case  of  grinding, 
buffing  and  similar  occupations  many  states  have  passed  strin- 
gent laws  making  proper  ventilation  of  such  machinery  compul- 
sory. (See  Art.  16.) 

The  question  of  sanitary  conveniences  for  workmen,  facilities 
for  washing  and  changing  their  clothes,  and  similar  features  of  the 
care  of  employees  other  than  those  discussed  above  have  been 
fully  discussed  in  Chapter  IV  and  are  referred  to  again  in  Chapter 
XIV.  They  will,  therefore,  not  be  elaborated  at  this  point. 

There  is  a  growing  sentiment  that  factory  buildings  should 
present  as  good  an  appearance  as  possible.  It  is  true  that 


244     PRINCIPLES   OF   INDUSTRIAL    ORGANIZATION 

architectural  beauty  is  difficult  to  attain  in  many  industrial 
structures  but  many  factory  buildings  are  most  unnecessarily 
ugly.  Just  as  a  well-designed  machine  is  pleasing  to  look  at,  so 
a  well-designed  factory  building  may  be  just  as  pleasing,  and  at 
a  small  additional  expense.  It  is  to  be  hoped  that  decentrali- 
zation of  industry  from  the  large  cities  may  result  in  more  model 
industrial  villages,  and  that  the  old  factory  town  with  its  prison- 
like  factory  buildings  and  bleak  and  barren  looking  tenements 
will  soon,  forever,  be  a  thing  of  the  past. 

REFERENCES : 

Industrial  Plants,  by  Charles  Day. 

Principles  of  Industrial  Management,  by  John  C.  Duncan. 

Factory  Organization,  by  Hugo  Diemer5  Chapter  3. 


CHAPTER   XIY. 

RESUME  —  THEORIES   OF   MANAGEMENT. 

129.  Business  Failures.  In  the  year  1912  there  were  15,299 
recorded1  business  failures  in  this  country,  involving  liabili- 
ties amounting  to  $202,219,352.  Of  these  failures  3781  were  in 
manufacturing  enterprises  involving  liabilities  amounting  to 
$88,488,412.  Many  industries,  of  course,  fail  through  losses 
incurred  from  causes  that  the  owner  cannot  avert  as,  for  in- 
stance, from  floods,  earthquakes,  changes  in  tariff,  new  inven- 
tions or  from  competition  from  those  possessing  vastly  superior 
advantages.  No  doubt,  however,  the  majority  of  these  failures 
are  caused  by  incompetence  of  one  kind  or  another  and  partic- 
ularly by  that  form  of  incompetence  that  comes  from  lack  of 
knowledge  of  some  part  of  the  business. 

The  following  table  compiled  from  Bradstreet's2  gives  some 
interesting  statistics  regarding  the  causes  of  business  failures. 
In  compiling  such  statistics  Bradstreet's  includes  only  such 
failures  as  result  in  financial  loss  and  not  those  that  fail  to  suc- 
ceed without  loss. 

TABLE   12.  —  CAUSES  AND  PERCENTAGE  OF  FAILURES. 


Causes  of  failures. 

1907 

1908 

1909 

1910 

1911 

Lack  of  capital 

37  1 

34  2 

34  5 

33  9 

31  4 

Incompetence 

22  6 

21  6 

24  2 

26  6 

27  0 

Inexperience 

4  9 

4  0 

4.9 

4.4 

4  1 

Unwise  granting  of  credit  
Speculation.  .  .    .                 

2.3 
0.7 

2.0 
1.0 

1.9 

0.8 

1.7 
1.0 

2.0 

Personal  extravagance  
Neglect  of  business  

0.9 
2.5 

1.0 
2.2 

0.9 
3.0 

0.7 
2.5 

2.2 

Fraudulent  disposition  of  property  
Specific  conditions  (disaster,  etc.).  .  .  . 
Failure  of  others       .           

10.1 
16.3 
1.4 

11.5 
18.9 
1.8 

10.8 
15.3 
1.2 

11.2 
14.4 
1  0 

10.6 
16.9 

Competition         

1.2 

1.8 

2.5 

2.6 

2.9 

1  See  extract  from  Dunn's  Report,  in  World's  Almanac  for  1913,  p.  278. 

2  See  Bradstreet's,  Jan.  21,  1911,  and  Jan.  27,  1912. 

245 


246     PRINCIPLES   OF   INDUSTRIAL   ORGANIZATION 

It  will  be  noted  that  lack  of  capital  is  by  far  the  most  impor- 
tant cause  of  failure,  incompetence  ranking  next  in  importance. 
Furthermore,  the  first  eight  causes  listed  are  all  causes  that  are 
due  to  faults  of  those  failing;  while  the  last  three,  only,  are  due 
to  causes  beyond  the  control  of  those  failing.  The  entire  first 
eight  causes  may  really  be  considered  as  forms  of  incompetence. 
The  percentage  of  the  first  class  as  compared  to  the  second  class 
for  the  years  noted  above  are:  1907,  81.1  to  18.9;  1908,  77.5 
to  22.5;  1909,  81  to  19;  1910,  82  to  18;  1911,  80  to  20.  It  will 
be  noted,  therefore,  that  four-fifths  of  the  failures  are  due  to 
faults  or  incompetence  on  the  part  of  those  failing.  It  will  also 
be  noted  that  the  proportion  of  those  that  fail  because  of  pure 
incompetence  tends  to  increase,  having  risen  from  22.6  per  cent 
to  27  per  cent  in  the  period  noted  above.  These  statistics 
should  certainly  furnish  food  for  thought. 

Industries  are  organized  primarily  for  the  purpose  of  obtaining 
a  return  on  investment.  The  three  great  branches  of  productive 
industry  are  Financing,  Manufacturing  and  Selling.  It  is  not 
enough  that  the  manufacturer  have  a  knowledge  of  one  or  two 
of  these;  he  must  be  versed  in  all  three  so  that  these  functions 
may,  like  the  gears  of  a  machine,  work  smoothly  and  accurately 
together.  Without  doubt  many  failures  are  due  to  a  lack  of 
knowledge  of  the  broader  problems  of  industry  in  all  three 
fields.  Many  enterprises  are  built  up  by  men  who  rise  from  the 
ranks.  In  general,  the  man  who  has  worked  at  the  machine  or 
the  bench  is  well  versed  in  the  manufacturing  side  of  the  industry 
and  is,  usually,  not  so  well  informed  in  sound  principles  of  finance 
and  sales.  It  is  not  surprising,  therefore,  that  many  enterprises 
outgrow  their  founders  and  either  fail  completely,  or  pass  into 
more  competent  hands.  A  discussion  of  the  more  refined  prin- 
ciples underlying  the  organization  of  successful  selling  or  finan- 
cial departments  is  beyond  the  limits  of  this  work;  but  there  are 
certain  fundamental  principles  underlying  economic  production 
that  will  be  noted  and  that  in  a  general  way  are  applicable  to  all 
forms  of  organization. 

Every  manufacturer  must  expect  to  rest  his  chances  of  success 
on  one  of  three  general  factors,  namely,  monopoly,  quality  or 


RESUME— THEORIES  OF  MANAGEMENT      247 

price.  Thus,  he  may  possess  valuable  patents  or  control  nat- 
ural resources  that  give  him  a  great  advantage,  if  not  complete 
control,  over  some  desirable  commodity.  Refined  methods  of 
manufacturing  and  selling  may  not  be  of  great  interest  to  him. 
Again,  he  may  appeal  to  the  public  to  purchase  his  goods  on  the 
ground  of  quality.  There  are  many  manufacturers  in  this  coun- 
try that  have  built  up  large  enterprises,  against  strong  competi- 
tion, by  supplying  product  so  good  that  all,  who  are  able,  buy  it 
in  preference  to  cheaper  goods  of  the  same  kind.  To  such  a 
man  refined  methods  are  highly  important,  for  if  he  can  make 
his  high  grade  product  for  little  more  than  the  inferior  kind 
his  chances  of  success  are  increased;  though,  no  doubt,  there  is 
often  an  advertising  advantage  in  asking  a  good  price  for  a  good 
article,  and  avoiding  the  appearance  of  competition  with  an 
inferior  brand. 

If,  however,  the  manufacturer  is  competing  in  the  open  field 
on  the  basis  of  the  lowest  price  for  a  fair  quality  of  goods  there 
is  no  item  in  either  manufacturing  or  selling  too  small  to  merit 
his  careful  attention.  The  market  prices  of  goods  possessing 
no  special  merit,  and  sold  under  competition,  are  always  so  low 
that  the  margin  of  profit  is  small  even  with  good  methods  and 
allows  no  margin  for  poor  methods.  In  fact,  these  prices  may 
be  so  low  as  to  allow  no  profit  except  under  the  very  best  condi- 
tions, and  once  these  prices  have  been  established  it  is  difficult  to 
raise  them;  "  the  trade  will  not  stand  it."  One  of  the  reasons 
why  it  is  difficult  to  raise  prices,  as  a  whole,  is  because  of  ruin- 
ous competition  by  men  who  do  not  know  what  their  costs  are, 
or  who  are  purposely  losing  money  on  one  line  of  trade  to  hold 
trade  in  others;  or  for  other  similar  reasons.  The  competitive 
manufacturer  often  cannot  make  his  price  on  the  basis  of  his 
costs,  as  he  would  like  to  have  them,  but  must  make  his  costs 
come  under  market  prices.  As  already  noted1  it  does  not  help 
him  to  know  that  his  competitor  is  in  time  " going  to  the  wall" 
because  he  knows  that  others  equally  incompetent  will  quickly 
take  this  competitor's  place,  thus  holding  the  market  price 
crystallized.  It  is  in  competition  of  this  kind  that  absolute 

i  See  Article  63. 


248     PRINCIPLES   OF   INDUSTRIAL    ORGANIZATION 

knowledge  is  necessary  and  every  refinement  must  be  practiced. 
A  full  knowledge  of  the  conditions  in  the  market  sought  is, 
therefore,  imperative. 

THEORIES  OF  MANAGEMENT. 

130.  Scientific  Methods.  As  enterprises  grow  in  size  the 
problems  of  administration  and  management  become  increas- 
ingly important  and  require  greater  consideration.  The  small 
grocer  can  very  well  be  his  own  porter,  clerk  and  cashier,  and 
can  effectively  perform  all  of  these  functions.  But  as  his  busi- 
ness begins  to  grow  he  begins  to  deputize  the  manual  side  of  his 
business  by  hiring  a  porter;  and  as  further  development  arises 
he  deputizes  a  part  of  his  mental  work  by  hiring  a  bookkeeper. 
This  process  continues  till,  if  his  business  is  to  succeed,  he  must 
organize  it  in  some  definite,  systematic  manner,  reserving  to  him- 
self supervisory  duties  only.  It  has  been  said  that  the  secret  of 
successfully  managing  a  large  enterprise  is  to  organize,  deputize 
and  supervise.  No  doubt  this  does  express  in  a  rough  manner 
the  fundamental  laws  of  successful  management,  but  it  may  be 
of  advantage  to  enquire  more  fully  into  the  details  of  manage- 
ment. 

Management  may  be  defined  as  the  art  of  applying  the  eco- 
nomic principles  that  underlie  the  enterprise  under  consideration. 
It  makes  itself  manifest  through  organization;  and  since  the 
principles  underlying  various  enterprises  vary  greatly  it  is  nat- 
ural that  forms  of  organization  must  also  vary  greatly  with  the 
character  and  magnitude  of  the  business  considered.  Now  it 
would  seem  reasonable  to  assume  that  if  the  economic  laws  or 
philosophy  underlying  the  accomplishment  of  any  undertaking 
can  be  discovered  and  recorded  they  will  form  a  guide  for  the 
management  of  all  similar  enterprises.  It  does  not  follow,  how- 
ever, that  any  man  who  knows  these  economic  laws  can  be  a 
successful  administrator.  Two  men  may  be  given  the  same 
equipment  of  machines  and  knowledge,  one  will  be  successful 
and  the  other  will  fail.  The  basic  facts  or  laws  of  any  field  are 
impersonal,  but  their  execution  or  administration  almost  always 
involves  personal  qualifications  on  which  success  or  failure  may 


RESUME— THEORIES   OF  MANAGEMENT      249 

and  usually  does  depend.  In  other  words,  there  may  be  a 
science  of  management  and  an  art  of  management  just  as  there 
is  a  science  and  an  art  in  house  building,  aviation,  agriculture 
and  other  lines  of  human  endeavor.  The  question  as  to  how 
far  the  art  of  management  may  be  considered  to  have  scientific 
foundation  has  been  the  cause  of  a  considerable  discussion  which 
may  bear  further  investigation.  This  naturally  leads  to  an 
inquiry  as  to  what  constitutes  a  scientific  foundation  in  any 
activity. 

The  fundamental  laws  that  underlie  any  art  may  be  known 
qualitatively  or  quantitatively.  Thus,  a  chemist  may  know  that 
if  a  certain  acid  is  added  to  a  given  mixture  a  certain  substance 
will  be  precipitated.  An  engineer  may  know  that  all  beams 
will  deflect  when  loaded.  If,  however,  the  knowledge  of  the 
chemist  or  engineer  does  not  go  beyond  these  limits,  the  fun- 
damental laws  governing  these  portions  of  their  respective  arts 
are  known  qualitatively  only.  Qualitative  knowledge  is  often 
expressed  empirically,  that  is,  in  terms  that  approximately  ex- 
press the  true  relations  that  exist  between  the  causes  and  effects 
considered.  The  literature  of  engineering  abounds  in  such  em- 
pirical statements. 

If,  however,  the  chemist  can  say  that  a  given  weight  of  a  cer- 
tain acid  will  precipitate  a  definite  amount  of  a  certain  material 
from  the  solution  under  consideration,  the  law  is  known  quan- 
titatively, and  fully.  In  a  similar  way  if  the  engineer  can  predict 
that  a  given  weight  will  deflect  a  given  beam  a  definite  amount, 
he  knows  the  law  of  the  deflection  of  such  beams  quantitatively, 
also. 

The  principles  that  underlie  any  art  become  known  through 
experience  and  the  degree  to  which  they  may  become  known 
depends  largely  on  the  amount  of  such  experience  and  the  efforts 
made  to  record  and  interpret  the  same.  In  the  early  stages  of 
any  art  such  knowledge  of  the  fundamental  laws  as  may  exist 
must  exist  as  part  of  the  personal  knowledge  of  some  man  or 
men.  And  even  after  these  laws  are  well  known  quantitatively 
they  are  still  often  preserved  by  being  passed  from  father  to  son, 
or  from  workman  to  apprentice,  without  record  of  any  kind. 


250     PRINCIPLES   OF   INDUSTRIAL   ORGANIZATION 

Quantitative  knowledge,  however,  involves  the  measurement 
of  cause  and  effect,  and  laws  are  fully  known  only  when  such 
measurements  have  been  made  in  sufficient  number  to  demon- 
strate beyond  doubt  the  exact  quantitative  relations  existing 
between  the  phenomena  considered.  And  it  is  only  where  the 
laws  of  an  art  are  fully  known  both  qualitatively  and  quantita- 
tively that  it  can  be  said  to  rest  fully  on  a  scientific  basis. 

If,  also,  the  qualitative  characteristics  and  the  quantitative 
measurements  of  any  law  are  fully  known  they  afford  the  means 
of  predicting  with  certainty  the  results  of  similar  operations 
under  the  determined  laws,  and  if  these  characteristics  and 
measurements  have  been  systematically  arranged  and  recorded 
they  become  impersonal  and  useful  for  all  men.  As  the  basis 
of  any  art  becomes  more  scientifically  developed  the  art  becomes 
less  and  less  dependent  on  personality;  for  scientific  investiga- 
tion consists,  in  part,  of  separating  facts  from  personal  opinion. 
This  point  of  view  is  important  in  attacking  any  problem,  even 
when  the  laws  involved  cannot  be  fully  determined.  The 
scientific  method  which  first  collects  all  the  data  or  facts  con- 
cerning the  problem,  analyzes  them  and  deduces  therefrom 
logical  conclusions  and  then  applies  these  conclusions  to  the  pre- 
diction of  results,  is  of  supreme  importance  in  all  kinds  of  work. 
Scientific  management,  so  called,  is  not  a  code  of  rules  as  much 
as  it  is  an  attitude  of  mind  that  aims  to  replace  "  I  think  " 
with  "  I  know;  "  and  the  extent  to  which  this  can  be  accom- 
plished will  depend  on  how  far  the  principles  involved  can  be 
developed  quantitatively. 

It  should  be  specially  noted,  however,  that  scientific  data  and 
system  can  never  take  the  place  of  personality  as  might  be  in- 
ferred from  some  of  the  literature  on  the  subject  of  industrial 
management.  Personality  has  always  been  and  will  always 
remain  the  great  moving  force  in  human  affairs.  But  person- 
ality alone  is  no  longer  sufficient  where  classified  knowledge  is 
a  factor  in  the  affairs  considered.  The  personality  of  a  Napoleon 
could  never  offset  modern  machine  guns  and  the  advanced  san- 
itary methods  of  guarding  the  health  of  troops.  The  personality 
of  the  greatest  physicians  is  often  a  small  thing  compared  with 


RESUME  —  THEORIES  OF  MANAGEMENT      251 

the  cold  science  and  skill  of  the  modern  surgeon.  All  other 
things  being  equal  the  advantage  rests  with  the  man  that 
possesses  the  greatest  amount  of  scientific  knowledge.  This  state- 
ment has  been  proved  in  so  many  fields,  from  warfare  to  house- 
keeping, that  it  needs  no  defense  and  little  explanation.  And 
it  is  evident  that  the  foregoing  discussion  applies  to  all  kinds 
of  human  activity  and  gives  us  a  standard  by  which  all  such 
activities  may  be  .measured  as  to  their  scientific  basis.  It  re- 
mains to  select  some  of  the  more  important  principles  underlying 
industrial  management  with  which  this  treatise  is  concerned  and 
apply  this  criterion  to  them. 

131.  Economic  Principles.  The  principles  underlying  indus- 
trial management  are,  in  general,  obviously  many  and  com- 
plex; but  among  those  that  underlie  economic  manufacturing 
the  following  are  perhaps  the  most  important.  (See  also  Article 
40.) 

(1)  The  principle  of  division  of  labor,  including  separation  of 
mental  and  manual  labor,  and  the  subdivision  of  both  mental 
and  manual  labor. 

(2)  The  principle  of  transfer  of  skill. 

(3)  The  principle  of  transfer  of  thought. 

(4)  The  principle  of  coordination  of  effort. 

(5)  The  relation  between  unit  cost  and  the  number  of  parts 
produced. 

(6)  The  systematic  use  of  recorded  experience. 

(7)  The  principles  governing  human  relations. 

As  before  noted  any  or  all  of  these  may  be  applied  to  the  gen- 
eral problem  of  the  several  fields  of  productive  industry  such  as 
sales,  factory  construction,  factory  organization,  and  factory 
operation,  or  they  may  apply  equally  well  to  the  details  of  the 
organization  of  any  single  department.  And,  as  before  noted, 
also,  the  degree  to  which  they  may  be  scientifically  applied  will 
depend  on  the  extent  to  which  they  are  known  qualitatively 
and  quantitatively  with  reference  to  the  case  in  hand.  They 
can  seldom  be  considered  independently,  since  their  effects  are 
usually  closely  interconnected.  And,  most  usually,  they  are 
known  qualitatively  only,  the  cases  where  any  one  of  these  prin- 


252     PRINCIPLES   OF   INDUSTRIAL   ORGANIZATION 

ciples  is  fully  known  quantitatively  being  the  exception  and  not 
the  rule. 

Division  of  labor,  for  instance,  is  well  known  in  a  qualitative 
sense.  Long  experience  has  taught  men  that  when  they  spe- 
cialize closely  they  become  more  expert  and  more  productive. 
But  there  are  no  data,  no  measured  results,  that  indicate  the 
relative  merits  of  different  combinations  of  divided  labor  or  the 
relative  gain  by  any  one  combination  over  performances  where 
each  man  does  many  functions.  Again,  in  organizing  any  fac- 
tory or  industrial  enterprise  the  manner  in  which  the  work  is 
divided  is  often  greatly  influenced  by  the  personality  of  the  men 
available;  for,  as  yet,  men  cannot  be  measured  and  selected 
to  fit  the  circumstances  but  the  work  must  often  be  arranged 
to  fit  the  man  available.  Men  cannot  be  obtained  by  specifi- 
cation as  can  steel. 

Furthermore,  the  manufacturing  processes  involved  in  the 
production  of  a  part  may  have  a  great  influence  on  the  extent  to 
which  division  of  labor  should  -be  employed,  since  division  of 
labor  is  greatly  affected  by  the  machines,  tools,  jigs,  etc.,  that 
are  employed.  These  in  turn  are  governed  largely  by  the  num- 
ber of  parts  that  are  to  be  made.  There  are  limitations,  there- 
fore, to  the  extent  to  which  division  of  labor  may  be  economically 
employed  if  for  no  other  reason  than  that  there  are  financial 
limitations  to  the  tools  and  fixtures  that  can  be  economically 
made  for  the  work.  One  of  the  chief  criticisms  of  the  many 
"  systems  "  of  organization  now  being  advocated  is  that  they 
do  not  recognize  these  limitations.  Too  many  of  the  advocates 
of  these  systems  think  in  terms  of  mass  production  only  and  as 
a  consequence  some  of  these  systems  are  of  little  use  to  the  small 
manufacturer,  if,  indeed,  they  are  not  often  actually  harmful. 

A  knowledge  of  the  limitations  of  a  system  is  often  as  important 
as  a  knowledge  of  its  advantages  and  the  intelligent  choice  of 
military  and  functional  principles  for  the  building  of  a  successful 
organization  will  depend  to  a  large  extent  on  a  recognition  of  the 
limitations  that  exist  in  each  principle  for  the  case  considered. 
Obviously,  the  general  principles  governing  division  of  labor  are 
at  present  known  only  qualitatively  and  it  is  questionable  if  they 


RESUME— THEORIES  OF  MANAGEMENT      253 

will  ever  be  so  fully  known  quantitatively  as  to  be  wholly  im- 
personal. 

The  engineering  department  of  a  manufacturing  works  is  a 
fine  example  of  the  application  of  some  of  these  principles.  Here 
the  character  of  the  mental  work  that  is  separated  from  the  other 
kinds  of  labor  incident  to  production  and  delegated  to  the  engi- 
neering department  is  clearly  defined  and  hence  the  character  of 
the  personnel  of  the  department  is  also  clearly  defined.  The  laws 
underlying  the  work  of  the  department  are,  to  a  large  extent, 
known  both  qualitatively  and  quantitatively.  These  have  been 
fully  developed  by  scientific  investigation  and  measurement  of 
the  principles  concerned,  and  prediction  of  results  based  upon 
them  can  be  made  with  some  degree  of  certainty.  When  the 
results  of  the  mental  labor  done  in  the  engineering  department 
are  transmitted  to  the  production  department,  they  are  definite 
and  impersonal  and  obviate  all  engineering  knowledge  on  the 
part  of  those  delegated  to  construct  the  product.  The  work 
of  the  department  is,  in  best  practice,  closely  coordinated  with 
that  of  the  other  departments  by  the  methods  discussed  in 
Chapter  VIII. 

The  work  of  the  tool  department  is  also  a  good  example  of 
the  same  principles  illustrated  by  the  engineering  department. 
The  work  delegated  to  this  department  is  partly  mental  and 
partly  manual;  and  the  result  of  the  efforts  of  the  department 
is  a  transfer  of  skill  to  the  production  department  in  the  form  of 
jigs  and  fixtures.  The  science  of  tool  making  is  fairly  well  de- 
fined. Viewed  broadly,  it  is  a  branch  of  the  science  of  build- 
ing and  equipping  industrial  plants.  The  financial  basis  on 
which  tool-making  jests  is,  however,  closely  connected  with 
other  factors  that  will  be  discussed  elsewhere. 

The  principles  of  coordination  of  effort  have  already  been  dis- 
cussed at  length  in  Chapter  VIII.  The  principle  of  coordination 
is  well  illustrated  in  the  work  of  the  designing  department  where 
many  parts  drawn  on  many  different  sheets  are  designed  so  as 
to  coordinate  perfectly  in  the  completed  product.  In  a  similar 
way  the  tool-maker  plans  the  several  operations  on  a  given  part 
and  makes  his  fixtures  accordingly  so  that  each  operation  co- 


254    PRINCIPLES   OF  INDUSTRIAL   ORGANIZATION 

ordinates  with  all  the  others  in  producing  the  shape  and  form 
desired. 

Coordination  of  effort  of  men  and  departments  with  reference 
to  time,  is,  however,  a  much  more  difficult  matter.  The  methods 
that  have  been  developed  for  accomplishing  this  result  have 
already  been  discussed  in  Chapters  VIII  and  IX  and  will  not  be 
repeated  here.  Brief  reflection' will  show  that  these  principles 
must  always  remain,  of  a  necessity,  more  or  less  qualitative  in 
character.  Coordination  of  effort  comes  as  a  direct  result  of 
division  of  labor,  and  becomes  increasingly  important  as  divi- 
sion of  labor  is  extended.  But,  as  has  already  been  noted,  the 
principles  of  division  of  labor  are  not,  and  probably  never  will 
be,  divorced  from  personal  attributes.  Administrative  prob- 
lems are  not  definite  and  quantitative  as  are  the  problems  of 
design;  and  as  the  extension  of  division  of  labor  introduces 
complex  personal  relations,  so  the  coordination  of  effort  made 
necessary  by  this  extension  is  even  more  complex.  Card  sys- 
tems, reports  and  committees  do,  of  course,  greatly  assist  in 
coordinating  the  work  of  the  several  departments;  but  there 
probably  never  will  be  one  best  way  of  doing  this,  and  personality 
must  always  remain  a  powerful  factor  in  this  part  of  the  field  of 
organization.  Here,  as  in  division  of  labor,  it  is  important  to 
note  carefully  the  limitations  of  any  system  or  clerical  machinery 
that  may  be  introduced  to  accomplish  coordination.  The  fail- 
ure of  enthusiastic  systematists  to  recognize  the  proper  balance 
between  system  and  personality  has  caused  the  downfall  of 
many  systems  and  the  loss  of  much  profit. 

The  work  of  Mr.  F.  W.  Taylor  discussed  at  some  length  in 
Chapter  IX  is  a  most  masterly  effort  to  apply  these  principles 
more  fully  to  the  problem  of  actual  production  as  occurring  in 
metal-working  establishments.  Functional  foremanship  is  simply 
an  effort  to  separate  mental  and  manual  labor  and  to  subdivide 
each  as  far  as  possible.  This  naturally  carries  with  it  the  neces- 
sity of  transfer  of  thought  and  transfer  of  skill;  the  result  of 
preplanning  by  the  planning  and  tool  departments.  But  when 
Mr.  Taylor  began  his  work,  the  scientific  basis  necessary  for  the 
successful  prediction  of  results  was  entirely  lacking,  the  prin- 


RESUME  —  THEORIES  OF  MANAGEMENT      255 

ciples  underlying  the  machining  of  metals  being  entirely  in  the 
qualitative  or  empirical  state.  By  means  of  time  and  motion 
study  Mr.  Taylor  was  able  to  collect  sufficient  data  and  to  deduce 
therefrom  quantitative  statements  regarding  the  cutting  of  metals 
that  enabled  him  to  use  division  of  labor  to  an  extent  hitherto 
unknown  in  the  machine  trades  and  comparable  with  the  method 
long  in  use  in  the  designing  department. 

It  was,  of  course,  necessary  to  provide  more  powerful  co- 
ordination of  effort  with  this  extension  of  division  of  labor  and 
this  was  provided  by  his  highly  developed  routing  system. 
This  routing  system  aims  not  only  to  have  every  operation  per- 
formed at  the  right  time,  but  also  aims  to  have  every  machine, 
and  every  man  occupied  as  steadily  as  possible.  The  whole 
conception  of  the  plan  is  perfectly  logical  and  clearly  thought 
out.  It  is  in  perfect  accord  with  the  best  economic  theory  of 
production.  It  is  true  that  there  are  no  new  principles  involved, 
but  the  application  is  new  and  Mr.  Taylor's  work  in  pointing 
out  the  possibilities  of  extending  these  principles  to  new  fields 
and  other  lines  of  work  is  of  inestimable  value.  These  essential 
principles  are  common  to  all  the  other  modern  so-called  efficiency 
systems  though  they  all  differ  more  or  less  in  details  of  operation, 
particularly  as  regards  remuneration  and  the  personal  element 
in  management. 

It  should  be  carefully  noted  that  time  and  motion  study  are 
not  essential  features  of  all  management.  They  bear  the  same 
relation  to  production  that  engineering  research  bears  to  design. 
They  are  methods  for  securing  basic  data,  and  if  these  data  are 
already  at  hand,  time  and  motion  study  are  not  necessary  except 
to  extend  the  data,  in  exactly  the  same  way  that  engineering 
research  extends  the  basis  of  design.  But  much  high-grade  de- 
sign can  be  done  at  present  on  the  basis  of  the  accumulated 
data  now  available;  and  time  and  motion  study  will  eventually 
cease  to  be  of  so  much  relative  importance  in  productive  pro- 
cesses as  the  data  in  all  lines  accumulate.  At  present  they  are 
of  great  importance  especially  in  mass  production.  But,  again, 
care  must  be  exercised  that  the  limitations  of  their  usefulness 
are  observed,  otherwise,  like  too  highly  developed  cost  systems, 


256     PRINCIPLES   OF   INDUSTRIAL   ORGANIZATION 

the  cost  of  the  results  will  be  out  of  all  proportion  to  their  use- 
fulness. There  are  many  kinds  of  work  where  refined  time  and 
motion  study,  for  the  sake  of  determining  principles  quanti- 
tatively, would  be  an  absolute  waste  of  money. 

The  limitations  of  functional  foremanship  or  any  other  system 
of  management  employing  extended  division  of  labor  are,  of 
course,  those  that  have  already  been  discussed  in  connection  with 
division  of  labor  and  coordination  in  general.  Like  most  refined 
productive  methods  they  are  of  greatest  value  in  mass  produc- 
tion, or  in  work  involving  parts  of  considerable  magnitude.  The 
underlying  principles,  however,  should  always  be  kept  in  mind 
in  the  smallest  enterprise  and  pushed  as  far  as  the  limitations 
will  allow.  It  may  be  of  interest  to  enquire  into  these  limitations 
a  little  farther. 

It  is  a  well-established  principle  in  manufacturing  that  the 
cost  of  production  of  any  given  product  tends  to  decrease  as  the 
volume  of  production  increases.  This  is  true  partly  because 
general  expenses  do  not  increase  in  proportion  to  productive 
costs,  hence  the  unit  cost  tends  to  decrease  with  increased  vol- 
ume. (See  Article  74.)  But  aside  from  this  decrease  in  cost, 
which  is  inherent  and  automatic,  increased  volume  is,  in  general, 
necessary  to  the  extension  of  division  of  labor  and  its  attendant 
economic  advantages  that  tend  to  reduce  unit  cost.  The  eco- 
nomic relations  that  exist,  therefore,  between  volume  and  unit 
cost  fix,  in  a  general  way,  the  extent  to  which  division  of  labor 
and  transfer  of  skill  and  thought  can  be  established.  As  a  con- 
sequence, it  also  governs  the  need  of  coordinative  methods.  It 
is,  in  fact,  the  criterion  before  which  these  matters  must  be 
judged;  for  no  matter  how  beautiful  in  theory  they  may  be,  they 
are  useless  unless  they  are  also  of  economic  value.  It  will  be 
noted  that  this  applies  whether  the  problem  be  to  reduce  the 
unit  cost  of  a  given  quantity  that  is  already  being  produced,  or 
to  decrease  the  unit  cost  by  increasing  the  quantity  that  is  being 
produced.  .  In  either  case  the  problem  is  to  reduce  the  number 
of  labor  hours  per  unit  of  product. 

To  illustrate,  the  grocer  who  can  adequately  handle  all  the 
details  of  his  business,  and  whose  sales  are  limited  by  territorial 


RESUME  —  THEORIES  OF   MANAGEMENT      257 

restriction  beyond  his  control,  would  not  be  justified  in  hiring  a 
porter  and  a  bookkeeper  on  the  sole  theory  that  division  of  labor 
would  lower  his  costs.  The  small  repair  shop  would  not  be  likely 
to  obtain  reduced  costs  by  installing  a  planning  system  and  a 
routing  clerk.  Yet  nearly  all  large  manufacturing  plants  have 
lines  of  work  in  which  the  volume  is  so  small  as  to  constitute  a 
manufacturing  problem  very  much  like  these  simple  and  obvious 
examples.  If  there  is  volume  enough,  division  of  labor  may  be 
carried  to  the  limit;  but  on  the  other  hand,  the  number  of  parts 
produced  may  be  so  small  that  the  efforts  of  one  man  m^y  Supply 
the  demand  and  division  of  labor  would  be  useless  "and  result  in 
a  financial  loss.  As  a  matter  of  fact,  a  critical  examination  of 
the  cost  of  parts  produced  in  small  quantity  in  factories  organized 
mainly  for  mass  production  is  more  likely  to  end  in  the  abandon- 
ment of  these  limited  fields  entirely  or,  in  other  words,  to  result 
in  a  further  specialization  of  the  factory. 

The  limiting  power  of  these  relations  is  even  more  clearly 
shown  where  transfer  of  skill  by  means  of  jigs  and  fixtures  is  also 
involved.  Where  special  jigs  and  fixtures  are  made  for  any  line 
of  product  they  should  be  considered  a  legitimate  part  of  the  cost 
of  the  product  and  their  cost  should  be  recovered  as  soon  as  pos- 
sible by  distributing  it  over  the  cost  of  a  number  of  machines  or 
other  units  of  product.  In  very  few  cases  should  special  tools 
be  carried  as  an  asset.  When  the  article  for  which  they  have 
been  made  is  no  longer  manufactured  such  tools  become  abso- 
lutely worthless  except  for  scrap,  and  their  value  even  as  such  is 
very  low.  Yet  this  principle  is  not  clearly  established  in  the 
minds  of  many  manufacturers  and  the  result  is  often  a  large 
accumulation  of  obsolete  tools  for  which  they  have  paid  much 
money  and  which  is  irrecoverable  except  through  sales  of  product. 
As  an  inventory  asset  they  are  fictitious,  ranking  with  old  pat- 
terns and  old  drawings. 

Manufacturing  is  a  financial  matter;  and  all  productive 
methods  should  be  judged  from  this  standpoint  as  well  as  from 
the  standpoint  of  mechanical  excellence  or  abstract  theories  of 
division  of  labor  and  transfer  of  skill.  Thus,  it  may  pay  to  make 
a  full  line  of  tools  and  fixtures  for  the  large  number  of  the  smaller 


258     PRINCIPLES   OF   INDUSTRIAL   ORGANIZATION 

sizes  of  a  given  product,  and  division  of  labor  may  be  economi- 
cally carried  to  an  extreme;  while  for  the  smaller  number  of  the 
larger  sizes  of  the  same  line  no  expenditures  for  special  tools  may 
be  justified  and  extreme  division  of  labor  would  result  in  a  finan- 
cial loss.  Between  these  extremes  the  number  and  character  of 
the  special  tools  that  it  will  pay  to  develop  will  vary,  the  allow- 
able financial  expenditure  for  special  equipment  gradually  de- 
creasing as  the  number  to  be  made  decreases. 

The  same  remarks  apply  to  the  purchase  of  special  machine 
tools.  Shop  men,  as  a  rule,  can  buy  standard  tools  with  dis- 
crimination where  only  the  characteristics  of  the  machine  need 
be  considered  and  its  use  covers  a  large  range  of  work.  But  the 
purchase  of  special  tools  is  quite  another  matter.  Such  tools 
are  limited  in  their  scope,  hence  they  will  pay  dividends  only 
when  a  sufficient  quantity  of  parts  suited  to  them  is  available. 
The  fact  that  a  special  lathe  will  machine  certain  parts  fifty 
times  as  fast  as  a  standard  lathe  is  meaningless  unless  there  are 
enough  of  these  parts  to  keep  it  in  operation  a  sufficient  length 
of  time  to  make  the  gain  by  its  use  more  than  offset  the  added 
interest  on  the  investment.  Yet  this  is  not  an  uncommon  source 
of  loss,  and  the  spectacle  of  high-priced  special  machinery  stand- 
ing idle  a  large  portion  of  the  time  is  not  infrequent.  And  the 
same  general  theory  applies  to  preplanning  of  work  either  in  the 
engineering  or  production  department.  It  would  be  foolish,  ob- 
viously, for  a  repair  shop  to  make  elaborate  drawings  of  small 
repair  jobs  on  which  the  work  required  was  self-evident;  yet 
in  giving  a  steamship  or  a  large  mill  a  thorough  repairing  much 
planning  in  both  drafting  and  tool  departments  might  be  nec- 
essary and  economical. 

It  should  be  specially  noted  that  this  regulative  principle,  the 
relation  between  quantity  and  unit  cost,  is  often  much  more 
definitely  known  and  capable  of  quantitative  application  than 
the  other  principles  already  discussed.  True,  good  judgment 
must  always  be  a  large  factor  in  its  use;  but  in  the  majority  of 
cases  the  relative  gain  or  loss  that  will  probably  occur  with 
change  in  quantity  and  method  can  be  computed  with  sufficient 
accuracy  to  make  a  wise  decision  probable.  The  three  principal 


RESUME— THEORIES   OF   MANAGEMENT      259 

factors  in  such  changes  are,  the  change  in  the  overhead  cost,  the 
increased  production,  and  the  added  capital  investment  and  the 
interest  thereon.  As  before  stated  these  factors  are  in  many 
cases  computable  with  reasonable  accuracy. 

In  a  similar  manner  the  number  of  machines  of  a  given  size 
that  it  is  desirable  to  manufacture  is  usually  a  financial  problem 
that  should  not,  in  general,  be  settled  by  any  one  man.  (See 
Article  47.)  The  amount  of  money  that  shall  be  invested  in 
raw  and  finished  stock  and  special  tools  and  fixtures  may  be  a 
critical  factor  in  the  life  of  the  business.  Yet  these  and  similar 
problems  are  often  decided  off-hand  or  to  suit  the  ideas  of  some 
salesman  who  is  concerned  only  with  quick  deliveries  and  does 
not  see  the  true  financial  problem  involved  in  carrying  a  large 
investment  in  raw  and  finished  product  and  manufacturing  tools. 

Brief  reflection  will  convince  anyone  that  the  application  of 
the  relation  that  exists  between  quantity  and  unit  cost  is  a  great 
if  not  the  great  regulative  principle  by  which  to  judge  the  first 
four  principles  of  this  article,  which  lie  at  the  bottom  of  all  mod- 
ern efficiency  systems  so  far,  at  least,  as  possible  financial  returns 
are  concerned. 

Whether  these  principles  can  be  economically  extended  in  any 
specific  case  will  depend  on  whether  the  increased  output  will 
be  obtained  at  an  equal  or  lower  cost.  There  is,  of  course,  an 
advantage  in  increased  output  at  equal  cost  provided  there  is  a 
market  for  the  product.  Furthermore,  each  industrial  under- 
taking is  a  problem  by  itself.  The  degree  to  which  the  principles 
of  division  of  labor  an'd  transfer  of  skill  may  be  applied  in  one 
place  is  no  criterion  whatsoever  as  to  what  may  be  suitable  else- 
where. Each  case  must  be  judged  by  the  regulative  principle 
discussed  above. 

It  is  self-evident,  also,  that  all  of  these  principles  become  better 
known  quantitatively,  and  are  less  personal  and  empirical  in 
character,  as  the  amount  of  recorded  data  bearing  on  their  oper- 
ation becomes  greater.  It  will  be  noted  in  this  regard  that  the 
basis  of  the  regulative  principle  (the  relation  between  unit  cost 
and  volume)  is  mathematical  and  hence  quite  definite,  provided 
the  effect  of  the  changes  considered  are  known.  Thus,  if  the 


260     PRINCIPLES   OF    INDUSTRIAL   ORGANIZATION 

increase  in  production,  the  added  investment  and  the  added 
burden  due  to  an  extension  of  division  of  labor  are  known,  the 
application  of  the  regulative  principle  is  quite  definite.  The 
exact  effects  of  division  of  labor,  transfer  of  skill,  etc.,  as  has 
already  been  noted  are  not,  in  general,  well  known  quantita- 
tively. There  is,  however,  a  growing  interest  in  the  recording 
of  basic  data  and  its  systematic  use  in  all  lines  of  industrial  work. 
The  possibility  of  successfully  planning  industrial  work  rests 
directly  upon  the  possession  of  such  data.  The  extent  to  which 
it  wdl  pay  to  plan  work  in  advance  will  be  governed  by  the  regu- 
lative principle  of  the  relation  between  unit  cost  and  volume  of 
product.  This  applies,  also,  with  equal  truth  to  the  application 
or  extension  of  any  of  the  economic  manufacturing  principles 
discussed  in  the  foregoing  paragraphs. 

HUMAN  RELATIONS. 

132.  The  foregoing  discussion  of  the  first  six  principles  of 
Article  131  has  considered  them  almost  entirely  as  machinery  of 
production,  and  their  possibilities  and  limitations  as  such.  But 
with  the  advance  in  productive  machinery  there  has  come  a 
change  in  the  evaluation  of  the  human  interests  involved  that 
is  far  more  important  than  these  advances  themselves.  The 
principles  governing  human  relations  permeate  every  nook  and 
corner  of  industry,  modifying  and  controlling  other  factors  as 
never  before  in  the  history  of  the  world.  They  are  ever  present 
and  cannot  for  an  instant  be  forgotten  or  ignored.  Until  very 
recently  these  relations  were  looked  upon  as  being  entirely  per- 
sonal. It  was  supposed  that  personality,  as  expressed  in  leader- 
ship, was  the  one  great  force  in  controlling  the  relations  of  men 
to  each  other.  It  is  still  true  and  will  always  remain  true  that 
leadership  is  a  prime  essential  to  the  success  of  any  enterprise 
involving  human  relations,  but  even  here  cold,  scientific  methods 
have  shown  that  some  of  these  matters  can  be  measured  and  the 
results  recorded,  and  this  has  brought  new  problems  into  the 
administration  of  human  affairs. 

Thus,  it  was  shown  in  Article  60  that  by  means  of  time-study 
methods  it  is  possible  to  measure  not  only  a  man's  possible  out- 


RESUME— THEORIES  OF  MANAGEMENT      261 

put,  but  also  to  set  the  most  economical  rate  at  which  he  can 
work.  By  this  method  the  law  of  human  bodily  effort  is  re-, 
moved  from  the  qualitative  to  the  quantitative  stage  of  knowl- 
edge and  the  result  of  bodily  effort  becomes  a  definitely  known 
factor  that  can  be  measured  and  recorded. 

Again,  motion  study  has  shown  that  inherited  methods  of 
doing  work  are  in  many  cases  most  wasteful  and  can  be  greatly 
improved  by  analytical  study.  Furthermore,  experimental  data 
can  here,  also,  be  recorded,  thus  making  it  possible  to  build  up 
synthetically  a  predicted  sequence  of  operations  that  is  much 
more  efficient  than  those  that  come  as  the  result  of  empirical  or 
inherited  methods. 

The  rewarding  of  labor,  so  long  a  strictly  empirical  matter, 
has  also  been  studied  analytically,  and  data  showing  the  ratio  of 
increased  reward  to  increased  output  are  already  at  hand.  In- 
vestigations of  this  character  naturally  carry  the  investigator 
off  into  psychological  measurements  of  human  relations.  This 
field  has  as  yet  been  barely  touched,  but  what  the  future  holds 
in  store  from  this  form  of  investigation  is  difficult  to  predict,  and 
without  doubt  the  near  future  will  see  remarkable  develop- 
ments in  the  art  of  measuring  factors  that  affect  human  rela- 
tions that  now  seem  intangible. 

Many  other  principles  that  probably  do  not  admit  of  quanti- 
tative measurement  are  rapidly  becoming  a  fixed  part  of  all 
intelligent  management.  It  is  now  clearly  recognized  that  if 
men  are  to  put  forth  their  best  bodily  efforts  they  must  be  well 
fed,  well  housed  and  well  clothed.  Aside  from  all  philanthropic 
ideas  it  is  found  that  the  physical  care  of  men  yields  dividends. 
This  thought,  however,  is  comparatively  new  to  many;  and  not 
many  years  ago  the  employer  gave  far  greater  attention  to  the 
care  of  his  horses  than  he  did  to  that  of  his  men.  If  this  is  true 
of  bodily  effort  it  is  even  more  true  of  mental  effort.  The  cost 
of  production  does  not  depend  upon  the  wage  rate  but  upon  the 
unit  wage  cost  which  is  a  function  of  quantity,  and  quantity  of 
output  depends  on  mental  and  physical  strength.  It  is  no 
secret  that  the  well-fed  American  can  easily  outwork  most  of 
his  foreign  competitors.  But,  as  noted  in  Chapter  IV,  the  caring 


262    PRINCIPLES  OF   INDUSTRIAL   ORGANIZATION 

for  the  physical  welfare  of  employees  is  not  an  act  of  charity, 
and  if  conducted  in  any  spirit  of  patronage  it  is  fatal  to 
management. 

Of  equal  importance  is  the  principle  that  it  pays  to  teach  men 
the  best  methods  by  which  work  can  be  done.  This  is  in  strict 
accord  with  all  human  experience;  yet  the  backward  state  of 
the  educational  side  of  factory  management  is  startling.  Even 
the  much  lauded  old  apprenticeship  systems  were  not,  as  a  rule, 
educational  in  a  true  sense.  The  apprentice  was  given  an  op- 
portunity to  learn  by  observation  and  absorption  but  was  rarely 
taught.  Is  it  any  wonder  that  the  accumulated  errors  and  waste- 
ful methods  of  the  trades  have  persisted?  If  time  and  motion 
study  have  done  no  other  service  than  to  call  attention  to  this 
fact  they  have  rendered  a  good  service.  It  is  rapidly  be- 
coming recognized  that  increased  refinement  in  methods  and 
higher  requirements  for  the  worker  can  be  met  only  when  coupled 
with  proper  methods  of  instruction.  It  is  not  sufficient  to  .set 
standards  that  only  a  few  men  can  reach  to  the  arbitrary  ex- 
clusion of  all  others.  Every  man  should  be  educated  industrially 
to  his  highest  capacity  in  the  work  for  which  he  is  best  fitted,  and 
every  man  should  be  given  an  opportunity  to  produce  to  the 
best  of  his  ability  and  rewarded  accordingly.  This  implies 
not  only  a  changed  point  of  view  on  the  part  of  our  public  schools, 
but  on  the  part  of  factory  management  also.  The  work  of  Mr. 
H.  L.  Gantt1  in  training  men  not  only  in  skill  but  in  habits  of 
industry  is  worthy  of  special  attention.  The  setting  of  stand- 
ards of  performance  means  very  little,  after  all,  unless  these 
standards  are  high.  And  if  they  are  high  they  can  be  reached 
by  the  majority  of  workmen  only  after  careful  training  and 
preparation. 

Now  it  would  seem  that  all  would  be  benefited  by  the  adoption 
of  all  fair  means  of  increasing  production.  The  greater  the  out- 
put per  man-hour  the  greater  will  be  the  surplus  of  production 
that  may  be  distributed  to  the  worker.  It  has  been  demon- 
strated that  in  the  long  run  increased  production  does  benefit 
all  men.  It  would,  therefore,  seem  reasonable  that  the  em- 
1  See  Work, Wages  &  Profits,  by  H.  L.  Gantt. 


RESUME  —  THEORIES  OF  MANAGEMENT      263 

ployer  should  use  such  scientific  data,  as  he  may  have,  to  prop- 
erly select  men,  matching  the  requirements  of  the  position  with 
the  characteristics  of  the  man.  It  would  seem  that  he  is  justi- 
fied in  measuring,  if  he  can,  what  a  fair  day's  work  should  be, 
and  paying  only  a  day's  wage  for  a  day's  work.  There  is,  in 
fact,  no  logical  argument  against  the  full  use  of  the  analytical 
or  scientific  method  in  attacking  any  problem  in  industry.  If 
all  men  could  be  brought  to  realize  the  economic  advantages  of 
this  method  of  attack  over  empirical  and  rule-of-thumb  methods 
the  standard  of  production  would  rise  tremendously. 

But,  on  the  other  hand,  it  must  be  recognized  by  the  employer 
that  he  can  no  longer  introduce  any  or  all  methods  into  his  shop 
at  will.  It  is  a  far  cry  to  the  days  of  the  Industrial  Revolution 
when  the  mechanical  side  of  factory  equipment  could  be  changed 
at  pleasure  and  the  human  portion  of  the  equipment  molded  to 
suit  the  mechanical  part.  A  new  industrial  day  has  dawned  in 
which  profits  are  not  the  most  important  factor.  More  and 
more,  industry  is  coming  to  be  looked  upon  as  a  means  of  sup- 
porting human  existence  and  not  as  a  means  of  corporate  profit. 
The  ideal  factory  so  far  as  producing  profits  is  concerned  would 
be  one  equipped  with  the  finest  of  machinery  and  manned  by  well- 
cared  for  slaves,  whose  reward  was  the  best  of  physical  care,  and 
the  mental  training  sufficient  only  for  the  needs  of  the  industry. 
This  ideal  might  well  have  been  imagined  a  few  hundred  years 
ago;  but  such  ideals  belong  to  the  past,  and  as  industrial  ideals 
have  moved  farther  and  farther  away  from  this  standard,  em- 
ployers, workmen  and  more  important  still,  public  opinion  have 
become  increasingly  critical  regarding  changes  in  industrial 
methods.  We  have  become  more  interested  in  men  than  in 
machines. 

The  quickness  of  the  Industrial  Revolution  and  its  sudden 
and  disastrous  effects  upon  the  workman  were  possible  because 
of  his  unprepared  condition  for  self  protection.  Present-day 
conditions  are  vastly  different.  Labor-saving  methods  of  man- 
agement differ  little  in  their  ultimate  economic  effect1  from 
those  of  labor-saving  machinery.  They  differ  in  their  applica- 

1  See  Chapter  III. 


264     PRINCIPLES   OF   INDUSTRIAL   ORGANIZATION 

tion  in  that  labor-saving  or  scientific  management  is  much  more 
personal  in  its  character,  and  affects  the  worker  much  more  in- 
timately. Its  principles  are  also  of  much  more  widespread  ap- 
plication than  those  of  machine  production.  There  is  no  business 
so  small  or  no  calling  so  humble  or  so  high  to  which  this  point  of 
view  is  not  applicable.  Yet  its  adoption  must  of  necessity  be 
slow  as  compared  with  that  of  the  principle  of  machine  pro- 
duction. 

Why  does  the  worker  naturally  resist  these  new  methods? 
First,  because  the  great  majority  of  men  are  naturally  afraid  of 
all  new  things  that  they  do  not  understand  and  the  effects  of 
which  they  cannot  clearly  foresee.  It  is  very  evident  to  the 
worker  that  time  and  motion  study  puts  into  the  hands  of  the 
employer  a  much  more  powerful  selective  agency  than  he  has 
hitherto  possessed,  and  the  worker  is  justly  afraid  of  these  scien- 
tific methods  in  the  hands  of  the  unscientific,  the  unscrupulous, 
and  the  ignorant  employer.  If  this  selective  power  is  used  solely 
for  the  purpose  of  sorting  men  so  as  to  eliminate  the  indolent 
and  those  that  are  clearly  unfitted  for  the  work  in  hand,  there 
can  be  no  objection  raised  against  it  from  the  humane  stand- 
point. If,  however,  it  is  used  to  eliminate  all  but  the  very  best 
workers  the  effect  will  be  disastrous  both  from  the  humane  and 
from  the  economic  standpoint  until  an  entire  readjustment  of 
the  field  has  taken  place.  What  is  needed  is  a  scheme  whereby 
every  man  can  be  worked  up  to  his  full  efficiency  whether  or  not  his 
output  be  as  great  as  that  of  his  neighbor. 

Secondly,  the  worker  may  object  to  these  new  methods  be- 
cause of  his  inherent  inertia.  The  workman  who  has  once 
learned  and  long  practiced  certain  methods  of  doing  work  is 
seldom  willing  to  admit  that  better  ways  may  be  devised  if  these 
ways  appear  to  be  radically  different  from  those  to  which  he  is 
accustomed. 

And  lastly,  he  naturally  opposes  these  new  methods  because 
his  own  experience  and  his  inherited  point  of  view  naturally 
lead  him  to  suspect  any  new  methods  that  promise  increased 
remuneration  for  increased  efforts. 

The  first  two  objections  may,  perhaps,  be  removed  by  educa- 


RESUME— THEORIES  OF   MANAGEMENT      265 

tional  methods  but  the  third  is  deep-rooted  and  involves  princi- 
ples that  even  the  advocates  of  the  new  methods  have  not  always 
fully  appreciated.  The  basis  of  this  objection  is  distrust  and 
the  root  of  distrust  is  most  usually  selfishness,  sometimes  on  the 
part  of  the  employee  but  more  often  on  the  part  of  the  employer; 
and  this  can  be  removed  only  when  employer  and  employee  can 
agree  as  to  what  is  a  just  and  equitable  division  of  the  profits 
of  industry;  and  this  involves,  not  the  application  of  scientific 
methods  to  human  relations,  but  the  application  of  the  "fair 
deal  "  on  the  part  of  all  concerned. 

Just  what  changes  shall  be  made  in  our  political  and  social 
structure  to  make  this  fair  distribution  possible  does  not  at  pres- 
ent seem  clear  and  prophesies  are  useless.  One  thing  is  clear, 
however,  and  that  is  that  such  changes  are  impending;  and  im- 
pending not  only  because  of  unrest  among  workers  of  the  lower 
grades  but  because  of  a  changed  point  of  view  among  the  people 
at  large.  Mr.  Redfield1  truly  says:  "  It  is  hard  to  realize  in 
the  ample  spaces  and  broad  areas  of  our  land  that  there  are  dark 
industrial  places,  that  men  and  women,  and  children  also,  are 
confined  in  foul  spots  and  driven  through  long  hours  at  pitiful 
pay  for  the  means  not  so  much  of  living  as  existence."  Yet 
this  fact  is  being  realized  more  fully  every  day  and  the  question 
of  increased  profits  is  daily  becoming  not  so  much  a  matter  of 
how  large  they  can  be  made  as  it  is  a  question  of  who  is  to  profit 
thereby  and  to  what  extent.  The  situation  is  perfectly  logical. 
It  would  seem  incredible  that  any  nation  as  intelligent  as  this, 
with  its  educational  standard  rising  steadily,  and  likely  to  attain 
a  height  hitherto  unknown,  will  not  arrive  at  a  solution  of  the 
division  of  the  profits  of  industry  that  will  be  fair  and  just,  and 
will  compel  all  men,  willing  or  unwilling,  to  abide  thereby. 
Labor-saving  management,  without  doubt,  will  be  much  used 
ultimately  because  its  economic  principles  are  valuable.  All 
such  principles  that  lead  to  multiplied  power  of  production 
eventually  come  into  use,  though  the  opposition  to  them  may  be 
very  great  at  first.  But  labor-saving  management  will  have  to 
justify  every  one  of  its  features  much  more  fully  than  did  its  pro- 
1  See  The  New  Industrial  Day,  p.  193. 


266     PRINCIPLES   OF   INDUSTRIAL   ORGANIZATION 

totype  labor-saving  machinery.     It  will  not  be  enough  that  it 
will  increase  profits,  it  must  justify  its  place  in  our  social  economy. 

ECONOMIC  RESULTS. 

133.  It  is  quite  obvious  that  the  productive  principles  dis- 
cussed in  this  chapter  and  elsewhere  in  this  book  can  be  com- 
bined into  many  different  systems  of  management.  The  general 
outlines  of  Mr.  Taylor's  system,  which  was  the  first  of  the  mod- 
ern systems  of  so-called  scientific  management,  were  discussed 
briefly  in  Chapter  IX.  There  have  been  several  other  similar 
systems  put  forward  since,  and  much  has  been  written  on  the 
subject  of  so-called  scientific  management.  To  such  an  extent 
is  this  true  that  the  many  descriptions  of  the  machinery  of  these 
systems  have  done  much  to  obscure  the  principles  that  lie  at 
the  bottom.  It  has  been  shown  here  that  these  principles  are 
few  and  comparatively  simple.  Scientific  management  is  really 
a  point  of  view  that  is  applicable  to  the  building,  equipping 
and  operating  of  all  parts  of  industrial  enterprises  and  not  alone 
to  the  work  of  production  in  metal-working  shops,  as  one  would 
be  led  to  believe  by  much  of  the  literature  of  the  subject.  It  is 
also  applicable  to  the  buying  of  raw  materials  and  selling  of  fin- 
ished product. 

Two  important  claims  have  been  made  for  these  new  methods; 
first,  that  they  will  greatly  increase  production,  and  second,  that 
they  will  solve  the  wage  or  labor  problem.  The  truth  and  limi- 
tations of  the  first  claim  have  been  fully  discussed.  It  remains 
to  consider  very  briefly  the  second  claim. 

The  ground  on  which  advocates  of  these  new,  yet  old  methods, 
base  this  second  claim  is  that  because  of  the  vastly  increased 
production  per  man,  when  using  these  methods,  unit  cost  will 
go  down  and  wages  will  go  up.  That  is  to  say  increased  pro- 
ductive power  necessarily  means  increased  profits  and  their  re- 
sulting comforts  to  the  actual  producer;  for  a  diligent  search 
through  the  principles  of  efficiency  engineering  fails  to  disclose 
any  new  principles  regarding  the  distribution  of  the  fruits  of 
labor.  True,  great  stress  is  laid  on  the  "  square  deal  "  and  co- 
operation of  employer  and  employee  in  all  these  systems;  but 
these  are  not  new  nor  peculiar  to  any  system  of  management. 


RESUME— THEORIES   OF  MANAGEMENT      267 

It  is  true,  of  course,  that  decreased  cost  of  production  always 
gives  the  employer  an  opportunity  to  pay  better  wages,  until  his 
competitors  obtain  the  same  methods,  when  the  natural  law  of 
competition  again  comes  into  effect  and  the  employer  is  again 
confronted  with  the  choice  of  smaller  profits,  lower  wages  or 
still  more  refined  methods  and  improved  tools. 

The  greatest  gain  in  productive  ability  that  the  world  has  ever 
witnessed  ca'me  with  the  introduction  of  labor-saving  machinery. 
All  the  possibilities  for  the  physical  and  mental  betterment  of 
humanity  offered  by  the  most  tremendous  gain  in  productive 
power  mankind  has  ever  witnessed  were  opened  up  at  that  time. 
The  immediate  effect  of  these  new  methods  was  to  reduce  the 
workers  concerned  to  a  state  of  pauperism  and  wretchedness 
which  was  relieved  only  by  legislation  and  other  reactive  meas- 
ures and  not  by  anything  inherent  in  the  new  methods.  These 
productive  methods  have  been  tremendously  improved  and 
added  to,  steadily,  for  over  one  hundred  years;  and  what  is  the 
net  result?  Today  the  skilled  mechanic  who  can  save  a  com- 
petence is  a  rarity.  Instead  of  the  individual  independence 
which  every  man  should  be  able  to  acquire  we  are  talking  of 
governmental  and  other  forms  of  pensions.  In  spite  of  our  much 
vaunted  increased  educational  facilities  only  twenty-five  per  cent 
of  the  entire  population  of  this,  the  most  favored  of  countries, 
get  the  minimum  amount  of  education  that  is  considered  nec- 
essary to  make  them  intelligent  citizens.  True,  the  workman  of 
every  calling  has  benefited  very  greatly  by  the  improved  methods, 
and  it  is  true  that  he  is  better  clothed,  better  fed,  and  better 
housed,  and  particularly  better  educated,  than  formerly;  but 
the  fact  remains  that  his  progress  has  not  been  proportionate 
to  our  increased  productive  capacity. 

Now  labor-saving  management,  as  has  been  shown,  does  not 
differ  in  its  action  or  ultimate  effect  from  that  of  labor-saving 
machinery;  and  while  it  must  be  conceded  that  it  will  increase 
production  there  is  no  reason  for  thinking  it  possesses  any  in- 
herent power  to  change  the  problem  of  distribution.  It  was 
noted  in  Chapter  I  that  the  total  wealth  that  any  community 
could  possess  depended  on  its  natural  resources  and  on  the  effi- 


268    PRINCIPLES   OF   INDUSTRIAL   ORGANIZATION 

ciency  of  its  tools  of  production;  but  that  the  average  wealth 
was  quite  another  matter,  and  depended  on  the  method  by 
which  the  fruits  of  labor  were  distributed.  Labor-saving  man- 
agement will  help  to  increase  the  total  wealth,  but  it  cannot  of 
itself  be  expected  to  do  more  than  labor-saving  machinery  has 
done  in  distributing  it. 

The  great  problem  that  confronts  us  is  not  that  of  production 
but  that  of  economic  distribution.  We  can  now  produce  more 
manufactured  goods  than  we  can  use,  and  far  more  than  is  needed 
to  make  all  of  us  comfortable.  All  the  new  productive  processes 
we  may  invent  will  throw  little  light  on  the  problem  of  why  we 
find  in  many  places,  at  the  one  time,  storehouses  filled  with  raw 
material,  idle  factories  equipped  with  the  finest  tools  the  world 
has  ever  seen,  and  people  walking  the  street  without  food  or 
clothing,  yet  willing  to  work. 

The  problem  is  too  complex  to  be  solved  by  the  simple  expe- 
dient of  increased  production.  There  still  remain  the  questions 
of  competition,  unfair  taxation,  immigration  and  a  dozen  other 
factors  that  are  not  as  yet  within  the  control  of  the  employer, 
be  he  ever  so  fair-minded,  or  of  the  employee,  be  he  ever  so 
strongly  organized.  It  may  be  that  a  readjustment  of  some  of 
these  would  do  as  much  for  all  workers,  both  employer  and  em- 
ployee, as  would  a  large  increase  of  productive  power.  What 
is  most  needed  is  scientific  distribution.  Fortunate,  indeed,  will 
we  be  if  some  of  the  reactive  influences  now  at  work  on  our  social 
and  industrial  organization  will  point  a  peaceful  way  to  this 
much  needed  readjustment.  Certain  it  is,  however,  that  no 
great  progress  in  this  direction  will  be  made  till  workmen  are 
willing  to  learn  forebearance,  and  employers,  setting  aside  sel- 
fishness, will  pray  as  did  Plato  of  old  "  may  my  store  of  gold  be 
such  as  none  but  the  good  can  bear." 

REFERENCES : 

Limitations  of  Scientific  Management,  by  H.  G.  Bradlee,  in  "Tech- 
nology and  Industrial  Efficiency." 

The  New  Industrial  Day,  by  W.  C.  Redfield. 

The  Report  of  the  Committee  on  the  Art  of  Management,  Transactions, 
A.S.M.E.,  Vol.  35,  1913. 

The  Psychology  of  Management.  A  serial,  by  L.  M.  Gilbreth.  In- 
dustrial Eng.  &  Engineering  Digest,  1913. 


INDEX 


Administrative  charts,  77. 
Aggregation  of  industry,  reasons 

34. 

Analytical  processes,  68. 
Arkwright's  water-frame,  10. 
Arts  and  crafts  movement,  27. 
Assets,  60. 

floating,  60. 

intangible,  59,  151. 

tangible,  151. 
Authoritative  diagram,  77. 

B 

Barth,  Carl,  slide  rules,  105. 
Bond,  58. 
Bondholders,  58. 
Buildings,  adaptation  of,  234. 

construction  of,  242. 
Burden,  factory,  114. 
Business  failures,  causes  of,  245. 


Capital,  57. 

account,  losses  on,  139,  145. 

stock,  57,  59. 

Cartwright  power-loom,  10. 
Committee,  characteristics  of,  89. 

complaint,  91. 

manufacturing,  89. 

suggestion,  91. 

system,  88. 

tool,  90. 

welfare,  91. 
Continuous  process,  68. 

diagram,  239. 

Contract  system  of  pay,  178. 
Cooperative  ownership,  62. 
Coordination,  76,  251. 
Corporate  directorate,  60. 

organization,  61. 


Corporation,  advantages  of,  61  c 

law,  62. 
e          Corporations,  52,  55. 

municipal,  56. 

nature  and  classification,  55. 

private,  56. 

public,  56. 
Cost  data,  sources  of,  120. 

elements  of,  112. 

factory,  114. 

flat,  114. 

prime,  114. 

shop,  114. 

total,  114. 

Costs,  need  of  accurate,  110. 
Crompton's  mule-jenny,  10. 
Cutting  metals,  data  on,  104. 


D 

Day  work,  definition  of,  171. 

characteristics  of,  171. 
Decrepitude,  141. 
Defective  material,  118. 
Deferred  maintenance,  142. 
Degradation  of  labor,  15. 
Departmental  system,  91. 
Depreciation      by      percentage      on 
diminishing  value,  155. 

by  percentage  on  original  cost,  155. 

by  sinking  fund  method,  159. 

classification  of,  161. 

Cole's  method  of,  160. 

comparison  of  methods,  159. 

investment  of,  164. 

methods  of,  148. 

nature  of,  139. 

rates  of,  161. 

relation  to  capital,  144. 

repairs,  147. 

Development  account,  119,  151,  162. 
Diagram,  authoritative,  77. 


269 


270 


INDEX 


Discipline,  70. 

Division  of  labor,  3,  10,  47. 

of  mental  labor,  48. 

of  thought,  48. 
Domestic  system,  5. 

E 

Economic  production,  principles  of, 

67,  251. 
results,  266. 

Efficiency  engineering,  67. 
Elevation  of  labor,  16. 
Emerson  efficiency  plan,  187. 
Engineering  reports,  86. 
Equipment,  arrangement  of,  235. 
Executive  control,  76. 
Expense,  characteristics  of,  122. 
classification  of,  116. 
commercial,  114. 

distribution  of,  on  labor  basis,  127. 
by  machine  rate,  130. 
on  man-hours,  129. 
material  basis,  126. 
prime-cost  basis,  128. 
by  production  centers,  133. 
factory,  114. 
general,  definition  of,  114. 

distribution  of,  136. 
order-number  list,  119. 
overhead,  114. 
selling,  114. 

Experimental  work,  119. 
Extension  of  field  of  labor,  16. 


Factory,  definition  of,  3. 
'  location,  231. 

office  salaries,  116. 

system,  2. 

definition  of,  3. 

welfare  work,  21. 
Financial  department,  48. 
Finished  parts,  206. 

parts  store-room,  206. 
Functional  foremanship,  96,  109. 

organization,  72. 


G 

Gain-sharing  systems,  171. 

Gang-boss,  98. 

Gantt,  H.  L.,  educational  methods, 

33,  107. 

bonus  plan,  185. 
Gary  steel  plant,  240. 
General  expense,  distribution  of,  136. 
Gilbreth,  F.,  work  of,  106. 
Golden  Age,  the,  6. 
Governmental  ownership,  62. 
Graphic  reports,  87. 
Great  inventions,  the  four,  8. 

character  of,  10. 

effects  of,  15. 
Grouping  of  machines,  236. 

H 

Halsey  premium  plan,  178. 
Handicraft,  2. 

Hargreaves'  spinning-jenny,  8. 
Heating  as  an  expense,  116. 

factor,  134. 

Horses,  depreciation  of,  141,  161. 
Human  relations,  260. 


Inadequacy,  142. 
Industrial  education,  30. 
engineering,  65,  67,  227. 
legislation,  24. 

character  of,  26. 
ownership,  forms  of,  52. 
plant,  arrangement  of,  227. 

location  of,  227. 
Revolution,  10. 
results  of,  17. 
in  the  United  States,  19. 
system,  1. 

Inspection  centralized,  223. 
during  manufacture,  220. 
in  general,  225. 
of  material,  219. 
purchases,  220. 
Inspector,  duties  of,  100. 

traveling,  223. 
Insurance,  118. 


INDEX 


271 


Instruction-card  clerk,  duties  of,  98. 
Instruction  card,  data  required  for, 

101. 

Interchangeability,  42. 
Interest,  117. 
Intermittent  processes,  68. 

diagram  of,  241. 
Inventory,  164. 


Military  organization,  70. 
Morris,  William,  28. 
Motion  study,  105. 

N 

Neglect  of  maintenance,  142. 

Net  worth,  59. 

New  Lanark  Mills,  22. 


Jack  of  Newbury's  factory,  6. 
Joint  stock  association,  52,  54. 


Labor    compensation   of,    basic   fea- 
tures, 168. 

direct,  113. 

indirect,  113. 

non-productive,  113. 

productive,  113. 

unionism,  27. 
Land-building  factor,  134. 
Legal  expenses,  117. 
Light  as  an  expense,  116. 
Limited  partnership,  54. 
Limits  in  purchasing,  215. 
Line  organization,  70. 
Line  and  staff  organization,  74. 

M 

Machine  rate,  130. 

and  supplementary  rate,  132. 
Management,  economic  principles  of, 
251. 

scientific  methods  in,  248. 
Manufacturing  committee,  89. 

definition  of,  2. 
Material,  direct,  113. 

economy  in  use  of,  217. 

expense,  113. 

indirect,  113. 

inspection  of,  219. 

purchasing  of,  201. 

sources  of  supply,  199. 
Maudslay,  Henry,  13. 
Medieval  factories,  6. 
Method  of  average  solution,  42. 


Oastler,  Richard,  25. 

Observation  of  limits,  in  purchasing, 

215. 

Obsolescence,  142. 
Order-of-work  clerk,  duties  of,  97. 

methods,  101. 
Orders,  manufacturing,  78. 
Organization,  functional,  72. 

line,  70. 

line  and  staff,  74. 

military,  70. 

principles  of,  65. 

record,  77. 

staff,  72. 
Owen,  Robert,  22,  25. 


Partnership,  52,  53. 

limited,  54. 

Pay  systems,  comparison  of,  190,  194. 
Peel,  Robert,  25. 
Physical  decay,  141. 
Piece  work,  definition  of,  171. 

characteristics  of,  174. 
Planning  departments,  49,  93,  95. 

principles  of,  93. 
Plant  ledger,  164. 
Power  as  an  expense,  116. 
Production  centers,  133. 

orders,  80. 

use  of,  in  purchasing,  213. 
Profit  and  loss  statement,  83. 
Profit-sharing  methods,  171,  197. 
Progress  report,  84. 
Purchases,  inspection  of,  220. 
Purchasing,  in  general,  201. 

principles  of,  202, 


272 


INDEX 


R 

Receiving  department,  220. 
Rent,  117. 

Repair  boss,  duties  of,  100. 
Reports,  engineering,  86. 

graphic,  87. 

importance  of,  83. 

interpretation  of,  86. 

progress,  84. 

sales,  86. 

special  cost,  84. 

weekly  labor,  84,  85. 
Returns,  manufacturing,  78. 
Revenue  account,  losses  on,  139,  145. 
Routing  clerk,  238. 
Route  rack,  102. 

sheet,  98. 
Rowan  premium  plan,  181. 

S 

Sales  reports,  86. 
Schedule  board,  102. 

of  Tabor  Mfg.  Co.,  103. 
Scientific  management,  49,  67. 
Sequence  of  processes,  238. 
Shop  conference,  90. 

disciplinarian,  100. 
Slater,  Samuel,  18. 
Special  cost  report,  84. 
Specialization,  advantages  of,  40. 

of  men,  39. 

industries,  34,  37. 
Speed  boss,  duties  of,  100. 
Spoiled  work,  118. 
Staff  organization,  72. 
Stamp  mill,  238. 
Standard  performances,    methods   of 

insuring,  107. 

Standards  of  performance,  105. 
Standardization,  34,  41. 

advantages  and  disadvantages  of, 

45. 
Stock,  205. 

certificate,  57. 


Stock,  common,  58. 

full-paid,  58. 

preferred,  58. 
Stockholders,  57. 
Stock  ledger,  215. 

room,  functions  of,  205. 

tracing  ledger,  216. 

treasury,  58. 

unissued,  58. 

watered,  59. 
Store-room,  functions  of,  205. 

methods,  206. 
Superintendence,  116. 
Supersession,  142. 
Synthetical  processes,  68. 
System,  departmental,  91. 


Taylor  differential  piece-rate,  182. 
Taylor,  F.  W.,  writings  of,   74,  96; 

97,  104. 
Taxes,  118. 
Tests,  assembly,  224. 

of  performance,  224. 
Theories  of  management,  248. 
Time-and-cost  clerk,  duties  of,  98. 
Time-clock  card,  81. 
Time  study,  105. 
Tool  committee,  90. 
Trade  Guilds,  4. 
Transfer  of  skill,  12. 
thought,  13. 


Value,  forced  sale,  150. 
present,  150. 
service,  150. 

W 

Watt's  steam  engine,  10. 
Wear  and  tear,  140. 
Weekly  labor  report,  84,  85. 
Work  card,  82. 


UNIVERSITY  OF  CALIFORNIA  LIBRARY 
BERKELEY 

Return  to  desk  from  which  borrowed. 
This  book  is  DUE  on  the  last  date  stamped  below. 


JON231952 


LD 

JAN  U  1959 


Ju» 


IN  STACKS 

MAR  12 1960 

REC'D  LU 

JUNS    1960 


fi»UI          JW 

7146sl6)476 


a  «, 


YC  39? 19 


UNIVERSITY  OF  CALIFORNIA  LIBRARY 


